FIFO
FIFO (First-In-First-Out) is a tax-lot relief method that sells the oldest acquired lots first. It is the default lot-relief method for most equities under SEC Rule 200, and the legacy default for mutual funds and ETFs absent an explicit alternative election by the taxpayer.
FIFO became the default for historical reasons rather than tax-efficiency reasons. It requires the least state — sell against the oldest open lot, no per-trade election needed — and was easy to implement before per-lot tax accounting became routine. The cost is real: on an appreciating position, the oldest lots typically have the lowest basis and thus the largest unrealized gain. A FIFO-default sell crystallizes that largest gain when alternative methods could have crystallized a smaller one.
The practical impact is most visible on long-held diversified equity positions. A household that began contributing to VTI in 2014 has lots stretching from $90 cost basis (2014) to $230+ cost basis (recent years). A FIFO sell of $20k of VTI taps the 2014 lot — a $14k+ gain — when an HIFO sell of the same $20k would tap recent high-basis lots and produce maybe $1k of gain. On a fee-paying advisor's behalf, the after-tax differential can dominate the advisor's annual fee.
Mutual funds historically defaulted to average-cost basis rather than FIFO; post-2012 tax-cost-basis reporting rules let mutual-fund holders elect specific-lot relief on the new 'covered' lots. The election is sticky — once made, it cannot be retroactively undone for already-executed trades — so the choice has consequence beyond a single sale.
| FIFO | Specific Lot ID | |
|---|---|---|
| Effort per trade | None — automatic | Per-trade selection |
| Tax outcome on gains | Worst on appreciating positions | Optimized — choose any lot |
| Tax outcome on losses | Best for harvest preservation | Optimized — choose any lot |
| Audit trail | Implicit | Explicit per-trade record needed |
| Default at most retail brokers | Yes | Election required |
Synthetic households need a mix of lot-relief settings: most accounts should default to FIFO (matching the SEC norm), but a meaningful minority should be on HIFO or specific-lot relief to exercise the alternative-method paths. Per-account, per-symbol overrides are common at sophisticated households and should be modelable, not all-or-nothing.
Common pitfalls
- Hardcoding FIFO without honoring a custodian's per-account override — some custodians let users change the default at the account level.
- Assuming FIFO produces the best tax outcome — it produces the worst on appreciating positions, the best only on depreciating ones (where you want the lowest basis sold last to preserve future loss-harvest opportunities).
- Not separating long-term-FIFO from short-term-FIFO — sophisticated lot-relief variants (LIFO-by-age-band) can intentionally select against ST lots first.
Examples
Same $10,000 sale, dramatically different tax bills.
Position: 100 shares of XYZ at $200 current price. Lots: Lot A: 30 shares @ $80 basis (acquired 2018, gain potential $3,600) Lot B: 40 shares @ $140 basis (acquired 2021, gain potential $2,400) Lot C: 30 shares @ $190 basis (acquired 2024, gain potential $300) Sell 50 shares ($10,000): FIFO: 30 from A + 20 from B → realized gain $4,800 HIFO: 30 from C + 20 from B → realized gain $700 LT vs ST mix differs too; FIFO tends LT, HIFO depends on lot ages.