Cost Basis Methods Explained: FIFO, ACB, and Specific Identification

When you sell shares that were purchased at different times and prices, the cost basis method determines which shares are considered sold — and therefore how much capital gain or loss you realize. The choice of method can significantly affect your tax bill. Understanding the differences between FIFO, ACB, and Specific Identification is essential for any investor.

FIFO (First In, First Out)

Under FIFO, the oldest shares are sold first. This is the default method for US tax purposes. If you bought 100 shares at $10 in 2020 and 100 shares at $20 in 2023, selling 100 shares under FIFO means you are selling the $10 shares first. If you sell at $25, your gain is $15 per share (long-term, since held more than one year).

When FIFO Works Well

FIFO tends to result in more long-term capital gains (taxed at lower rates in the US) since you are selling your oldest, cheapest shares. In a rising market, this means larger gains but at potentially preferential tax rates.

ACB (Average Cost Base)

ACB uses the average cost of all shares held. This is the required method for Canadian tax purposes for most securities. Using the same example: total cost is (100 x $10) + (100 x $20) = $3,000 for 200 shares. ACB per share is $15. Selling 100 shares at $25 gives a gain of $10 per share.

When ACB Applies

Canadian investors must use ACB for identical securities in non-registered accounts. This simplifies record-keeping since you do not need to track individual lots, but it also means you cannot choose which specific lots to sell for tax optimization.

Specific Identification

Specific Identification lets you choose exactly which shares to sell. Using the same example: if you sell at $25, you could choose to sell the $20 shares (gain of $5 per share) or the $10 shares (gain of $15 per share). This gives you the most control over your tax outcome.

When to Use Specific ID

Specific Identification is valuable for US investors who want to minimize taxes by selling higher-cost lots first (to reduce gains) or selling lots that create long-term gains (lower tax rate) rather than short-term gains. You must identify the specific shares to your broker at the time of sale.

Comparison Summary

• FIFO: Default in US; sells oldest shares first; tends toward long-term gains; no choice required.
• ACB: Required in Canada; average cost of all shares; simplest record-keeping; no lot selection.
• Specific ID: Optional in US; maximum tax control; requires identifying lots at time of sale; most complex.

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