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

Thanks for the clear explanation. Does this mean if I don't specify anything when selling, the IRS automatically assumes I'm using FIFO? Also, is there any advantage to using LIFO instead? Like would it be better for minimizing taxes in some situations?

Yes, if you don't specify anything when selling, both your broker and the IRS will default to FIFO. This is why it's important to plan your sales if tax management is important to you. There can definitely be advantages to using different methods depending on your situation. LIFO can be beneficial if your newer purchases are at higher prices and you want to realize losses to offset other gains. Specific identification gives you the most control - you can strategically select which lots to sell based on your overall tax situation. For example, you might want to realize long-term gains (held >1 year) instead of short-term gains that are taxed at higher rates, or harvest specific losses to offset gains elsewhere.

Does taxr.ai connect directly to brokerages like Fidelity? I'm using three different platforms (got carried away lol) and the thought of manually entering everything makes me want to cry.

I'm skeptical about these tax tools. Does it actually help with the form filing or just gives advice? I've had bad experiences with other tax software completely missing things when I had investment income.

It doesn't connect directly to brokerages yet, but you can upload your statements or transactions CSV and it imports everything automatically. I was in the same boat with multiple accounts and it handled that just fine - saves so much time compared to manual entry. The tool does both - gives strategic advice about which lots to sell and also helps with the actual tax forms. It generates the full Schedule D and all the necessary forms for reporting investment income. What impressed me most was how it caught several wash sales I had no idea about that my previous tax software completely missed.

Wait you can retroactively change the lot selection method after selling? I thought once the trade was executed that was it. How far back can you go to make these adjustments?

This sounds like a paid service just to talk to customer service? That's ridiculous, why would anyone pay for something that should be free? I'm sure if you just stay on hold long enough you'll eventually get through.

You can typically make adjustments until the settlement date of the trade (T+2 for most securities). So you have a small window, not indefinitely. In some cases with proper documentation, brokers might allow adjustments for a bit longer, but it's entirely at their discretion. I completely understand the skepticism about paying to reach customer service. I felt the same way initially! But after spending literally 4+ hours across multiple days trying to get through and being disconnected repeatedly, the time savings alone was worth it. It's not just about waiting on hold - it's about navigating the maze of automated systems that seem designed to prevent you from reaching a specialized representative who can actually help with cost basis questions.

This is what I've been trying to do but I'm confused about one thing - do you have to specify the exact purchase date for each lot? I have like 20 different purchase dates for some stocks I've been DCAing into for years. Seems super tedious.

You don't always need to specify the exact purchase date, though having that info helps. What you really need is the cost basis for each lot and whether it's long or short term. Most broker interfaces will show you a list of all your lots with their purchase dates and costs when you go to sell. It can be tedious if you have lots of small purchases, but the tax savings can be substantial. Some brokers have tools that let you filter lots by criteria (like "sell all lots with losses" or "sell oldest shares first"). Also, once you get in the habit of doing this with each trade, it becomes pretty quick. The tax optimization is definitely worth the extra minute or two per trade.

You're right, I got the terminology mixed up! I've been reading so many different articles and they must have been using different terms. LIFO makes more sense anyway (Last In, First Out). That wash sale rule is definitely something I need to watch out for. I've definitely been guilty of selling something and then buying it back a week later when the price drops more. Didn't realize that could affect my tax situation.

The wash sale rule is the WORST when you're actively trading. I got completely burned last year when I didn't realize my IRA purchase triggered a wash sale on a loss I took in my regular account. Such a headache.

This is exactly the kind of holistic approach I wish I'd taken from the beginning! I've been so focused on individual trades that I never thought about the bigger picture strategy. Your point about year-end portfolio review is really smart - I bet there are tons of optimization opportunities I'm missing by not looking at everything together. The spreadsheet idea is brilliant too. I've been relying entirely on my broker's records, but having my own tracking system would definitely help me understand patterns and make better decisions. Did you include anything specific in your spreadsheet beyond purchase dates and amounts? Like maybe notes about market conditions or your reasoning at the time? And yeah, that wash sale trap is so easy to fall into, especially when you're emotionally reacting to market moves. Thanks for sharing your experience - it's really helpful to hear from someone who's been through this learning curve!

This is such a great point about the holding period rules! I've been so focused on the cost basis calculations that I completely overlooked how the timing affects the tax rates. The example you gave really makes it clear - sometimes taking a bigger gain can actually result in less tax if it qualifies for long-term treatment. I'm curious though - is there an easy way to track this when you're making frequent purchases of the same stock? Like if I'm dollar-cost averaging into an index fund every month, how do I keep track of which lots are approaching the one-year mark so I can plan sales strategically? Does your broker usually make this obvious in their interface, or do you need to track it separately? Also, do the wash sale rules interact with the holding period at all? Like if I sell shares for a loss and then rebuy within 30 days, does that affect when the new shares would qualify for long-term treatment?

Great questions! Most modern broker interfaces do show holding periods pretty clearly - they'll usually have columns showing purchase date, days held, and whether each lot qualifies as long-term or short-term. At Fidelity, when you go to sell, it shows "ST" or "LT" next to each lot which makes it easy to see at a glance. For tracking frequent purchases like DCA into index funds, I actually set calendar reminders for about 11 months after each purchase so I know when lots are approaching long-term status. Some people use apps or spreadsheets, but the calendar approach works well for me since I can plan potential sales around those dates. Regarding wash sales and holding periods - yes, they do interact! If you trigger a wash sale, the holding period of the shares you sold gets added to the holding period of the replacement shares. So if you sell shares you held for 10 months at a loss and rebuy within 30 days, your new shares start their holding period clock with those 10 months already counted. It's actually one of the few beneficial aspects of the wash sale rule - you don't lose progress toward long-term status. This is another reason why good record keeping becomes crucial when you're actively trading the same securities frequently.

This is such excellent advice about not letting tax optimization override good investment decisions! I made exactly this mistake when I first learned about tax-loss harvesting - I was so focused on realizing losses that I ended up selling some solid long-term positions during temporary dips just to get the tax benefit. The psychological aspect is so real. There's almost an addiction to trying to optimize every single trade for tax efficiency, but you're absolutely right that it can lead to analysis paralysis or worse, poor investment choices. I've found it helpful to set some basic rules for myself - like I won't sell a position I believe in long-term just for tax purposes, and I won't hold onto a fundamentally bad investment just to get long-term treatment. Your point about keeping a decision log is spot on too. I started doing this after reading some behavioral finance stuff, and it's amazing how many patterns you start to notice in your own decision-making. Plus it really helps during tax season when you're trying to remember why you made certain trades months ago! Thanks for adding that perspective - it's easy to get lost in all the technical details and forget that taxes are just one piece of the puzzle.

Thanks for mentioning Fidelity's Tax-Loss Harvesting tool! I had no idea that existed and I've been using Fidelity for over a year. Just logged in and found it under the "Planning & Guidance" section - this is exactly the kind of visualization I needed to understand how my portfolio looks from a tax perspective. Your point about building the habit of always specifying lot selection is really smart. I can already see myself forgetting to do it on smaller trades and then kicking myself later. Better to just make it automatic from the start. It's actually reassuring to hear that others went through this same learning curve. Sometimes I feel like I'm the only one who jumped into active trading without understanding the tax implications first. But you're right that this stuff isn't explained well anywhere - even the "investing 101" content I consumed never really covered the practical day-to-day tax management aspects. I'm definitely going to spend some time this weekend playing around with that tax tool and maybe doing some paper trading scenarios to get comfortable with the lot selection process before I make any more real trades.

This is incredibly helpful perspective from a tax professional! I hadn't even considered how my expected future tax bracket should influence my lot selection strategy. That's a whole other layer of complexity I need to think about. The point about the Net Investment Income Tax is especially eye-opening - I'm nowhere near those thresholds now, but if my trading continues to be successful, it's something I should probably start planning for. It sounds like there's a lot more strategic planning involved than just "pick the lots with the best cost basis." Your comment about it becoming second nature is reassuring. Right now it feels like there are so many variables to consider (cost basis, holding period, current vs future tax brackets, NIIT thresholds) that I'm worried I'll make the wrong choice. But I suppose like any skill, it gets easier with practice. Do you have any recommendations for resources where I can learn more about the broader tax strategy aspects? Most of what I've found focuses on the mechanics of FIFO vs LIFO but doesn't get into the bigger picture planning you're describing.

For broader tax strategy resources, I'd recommend starting with IRS Publication 550 (Investment Income and Expenses) - it's dry but comprehensive. The Bogleheads wiki also has excellent sections on tax-efficient investing that go beyond just the mechanics. For more advanced planning, consider Kitces.com - Michael Kitces writes detailed articles about tax strategy that bridge the gap between basic concepts and professional-level planning. His pieces on tax-loss harvesting and asset location are particularly good. One practical tip: start tracking your marginal tax rate each year and any major life changes that might affect it (job changes, marriage, kids, etc.). This will help you make better real-time decisions about when to realize gains vs losses. You're right that it seems complex at first, but most people only need to master a few key concepts to capture 80% of the available tax savings. Also, don't underestimate the value of a one-time consultation with a fee-only financial advisor or CPA who specializes in investment taxation. Even just an hour or two of personalized advice based on your specific situation can save you years of trial and error.

This is such a practical approach! I love the idea of creating a spreadsheet to model different scenarios with your actual trades. That's exactly the kind of hands-on learning tool I need to really understand the concepts instead of just reading about them in theory. Your point about timing being crucial for tax-loss harvesting is something I hadn't fully grasped either. I was thinking about it as just a trade-by-trade decision, but you're right that it needs to be coordinated with your overall tax strategy for the year. Do you do this planning at specific times during the year, or is it more of an ongoing process as opportunities arise? The note-taking idea is brilliant too - I can already imagine myself six months from now trying to remember why I chose specific identification over FIFO for some random trade. Having that context documented at the time of the decision seems like it would be invaluable for learning from your choices and improving your strategy over time. Thanks for sharing Publication 550 as a resource too. I keep seeing references to various IRS publications but wasn't sure which ones were actually worth reading versus just overwhelming technical jargon. Good to know there are practical examples in there that you can work through with real scenarios.

Welcome to the community and thanks for sharing your experience! It's really validating to hear from someone who went through the exact same learning curve. That feeling of realizing you overpaid on taxes because you didn't understand lot selection is so frustrating, but at least now you know what to do going forward. Your tracking system sounds like a great practical approach. I'm still figuring out the best way to stay organized with this stuff, and it sounds like taking those few minutes before each sale to review your options is a habit worth developing. It's crazy how much of a difference being intentional can make versus just accepting the defaults. One thing I'm curious about - when you're looking at your lot options before a sale, do you have a systematic way of deciding which method to use, or is it more case-by-case based on your current tax situation? I'm still trying to develop some consistent decision-making criteria so I'm not just guessing each time. And you're absolutely right about this community being great for learning practical stuff that's hard to find elsewhere. The real-world experiences and specific tools people have shared here are way more helpful than the generic investing advice you usually see online.