Understanding FIFO / FILO on stocks for tax reporting - which method is better?

Great question about FIFO vs FILO (more commonly called LIFO) for stock sales! This is something many active investors overlook until tax time. For tax purposes, FIFO (First In, First Out) means exactly what you thought - when you sell shares, the IRS assumes you're selling your oldest shares first. LIFO (Last In, First Out) or FILO as you called it means selling your newest shares first. There's also specific identification where you can choose exactly which shares to sell. In your XYZ example: Using FIFO, you'd be selling all 50 of your oldest shares ($75) plus 10 of your newer shares ($120). So your gain/loss would be: 50 shares × ($100-$75) + 10 shares × ($100-$120) = $1,250 gain - $200 loss = $1,050 total gain. Most brokers default to FIFO unless you specifically direct otherwise, including Fidelity. You generally need to specify which lots you want to sell at the time of the transaction. You can use different methods for different stocks, but you need to specify this at the time of sale, not after the fact.

I've been using https://taxr.ai for managing my investment tax stuff and it's been a game changer for exactly this kind of situation. I was super confused about lot selection and cost basis when I started trading more actively last year. I uploaded my Fidelity statements and it showed me the tax implications of different selling strategies before I made trades. Apparently I'd been doing it all wrong and probably overpaid thousands in taxes. The tool actually explains which lots would be best to sell based on your overall tax situation and helps track everything for tax time. It also showed me how to do tax-loss harvesting properly by identifying which specific shares to sell. Seriously made the whole FIFO/LIFO decision much clearer with actual numbers from my portfolio.

Just wanted to update that I tried taxr.ai after seeing the recommendation here. Honestly mind blown at how much easier this makes things! I uploaded my statements from all three brokerages and it immediately identified several places where I could have saved on taxes with better lot selection. I was basically throwing money away by not paying attention to FIFO vs specific identification. The interface is super straightforward and actually EXPLAINS things rather than just giving numbers. I'm not a tax expert by any means, but now I feel like I can make smarter selling decisions. Already saved about $1,200 in taxes by identifying some lots I should sell now for tax-loss harvesting. Wish I'd known about this earlier!

If you're running into trouble getting answers from your broker about tax lot methods, I highly recommend using https://claimyr.com to get through to a real person at Fidelity. I spent HOURS trying to get clear answers about changing my default cost basis method and kept getting stuck in their automated system. Finally tried Claimyr after a friend suggested it, and they got me connected to a Fidelity investment specialist in about 10 minutes. The specialist walked me through the exact process for selecting specific lots when selling and even helped me retroactively adjust some recent sales where I should have used specific identification instead of FIFO. You can see how it works here: https://youtu.be/_kiP6q8DX5c Turns out Fidelity actually has pretty flexible options but it's buried in their system and the regular customer service people don't always know the details.

Well I stand corrected about Claimyr. After my skeptical comment I spent 2.5 hours today trying to reach someone at Fidelity who could explain my cost basis options. Got transferred three times and then disconnected. Finally broke down and tried the service and got through to someone who actually knew what they were talking about in less than 15 minutes. The Fidelity rep explained that I had been using default FIFO for everything but could use their "lot relief method" tool to specify exactly which shares I want to sell. Also learned they have a tax lot optimizer that I never knew existed because it's not prominently displayed in their interface. Definitely saved me a lot of headache for future trades.

Something nobody mentioned yet - SpecID (specific identification) is actually better than both FIFO and LIFO in most cases. You can cherry-pick exactly which shares to sell to optimize your tax situation. For example, if you have some shares at a loss and some at a gain, you can selectively sell the losers to harvest tax losses. Or if you're trying to qualify for long-term capital gains rates, you can specifically sell shares you've held over a year. Just make sure you specify BEFORE the trade executes. Most brokers make you select the tax lots during the order process now.

Just wanna point out - FILO isn't actually the right term. It's LIFO (Last In, First Out). FILO would be First In, Last Out which is just another way of saying LIFO. But everyone in accounting and tax uses LIFO. Also be aware that wash sale rules can mess up your clever tax planning if you're not careful. If you sell at a loss and buy substantially identical securities within 30 days before or after, you can't claim the loss.

This is such a timely discussion! I've been struggling with the same issues since I started more active trading this year. One thing I learned the hard way is that you really need to think about your overall tax strategy, not just individual trades. I initially just used whatever my broker defaulted to (FIFO), but after talking to my CPA, I realized I was missing opportunities. Now I try to look at my entire portfolio at year-end and see if there are strategic moves I can make. Sometimes it makes sense to realize some losses to offset gains, or vice versa. Also want to echo what others said about keeping good records. Even with all these fancy tools and broker statements, I started keeping my own spreadsheet tracking purchase dates, amounts, and my reasoning for each sale method I chose. Makes tax prep so much easier and helps me learn from past decisions. The wash sale rule mentioned above is definitely a trap - I almost fell into it myself when I panic-sold during a market dip and then bought back in too quickly.

As someone who works in tax preparation, I see this confusion all the time during tax season! You're definitely not alone in feeling overwhelmed by the FIFO/LIFO/SpecID decision - most of my clients who've transitioned to active trading have the same questions. One thing I always tell people is to think about your overall tax situation, not just the individual trades. If you're in a higher tax bracket this year but expect to be in a lower one next year (maybe due to retirement, job change, etc.), you might want to defer gains by using specific identification to sell your highest cost basis shares first. Conversely, if you expect to be in a higher bracket next year, it might make sense to realize some gains now. Also, don't forget about the Net Investment Income Tax (3.8% additional tax on investment income for higher earners). If you're close to those thresholds, strategic lot selection can help manage not just your regular capital gains tax but also whether you trigger NIIT. The good news is that once you get the hang of this, it becomes second nature. And the tax savings really do add up over time - I've seen clients save thousands just by being more intentional about their cost basis elections. Keep asking these questions and learning!

This has been such an educational thread! I'm relatively new to active trading myself and had no idea there were so many strategic considerations around cost basis methods. One thing I'm wondering about that hasn't been covered much - how does this all work with dividend reinvestment plans (DRIPs)? I have several positions where I've been automatically reinvesting dividends for a couple years, which means I have tons of tiny lots at different prices. Does this make specific identification super complicated, or do most brokers handle this reasonably well in their interfaces? Also, for those using tax optimization tools like taxr.ai that were mentioned earlier - do they account for DRIP purchases when calculating the best lots to sell? I'm imagining that with dozens of small dividend reinvestment lots, the optimization becomes pretty complex. Appreciate everyone sharing their experiences here. This is exactly the kind of practical knowledge I wish someone had told me about when I first started investing more actively!