Open Tax Lot Tracking: Cost Basis, Wash Sales, and Holding Periods

Open tax lot tracking is the practice of recording every purchase of a security as its own line item — date, price per share, number of shares, and security identifier — so that when you sell, you can choose which specific shares leave your account and control the resulting tax. Each of those purchase records is a tax lot. Buy the same stock five separate times and you hold five open lots, each with its own cost basis and holding period. As long as you still own the shares, the lot stays open. When you sell, those shares close. Without this granularity, you’re stuck with whatever default your broker applies, and the default rarely produces the best tax result.

What Each Open Lot Records

A usable lot record needs four things: the security identifier (typically a CUSIP number, the nine-character code that uniquely identifies U.S. and Canadian securities),¹ the purchase date, the price per share, and the number of shares. All of this appears on the trade confirmation your broker issues after each purchase.

The purchase price, including commissions, sets the cost basis for that lot. Buy 200 shares at $48.30 plus a $4.95 commission and the lot’s basis is $9,664.95. That number is what the IRS will subtract from your sale proceeds to determine gain or loss. The purchase date starts the holding period clock, which decides how that gain gets taxed.

Why the Holding Period on Each Lot Matters

Sell a lot you’ve held one year or less at a profit, and the gain is short-term, taxed as ordinary income at your regular federal rate. Hold it more than a year and the gain is long-term, taxed at 0%, 15%, or 20% depending on your taxable income. The IRS counts the holding period starting the day after acquisition through the day of sale.²

The gap is real money. Someone in the 32% ordinary bracket who sells an 11-month lot pays 32% on the gain; waiting one more month drops that to 15% in most cases. Open lot tracking makes the threshold visible per lot, so you know which shares have crossed the one-year mark and which haven’t.

Cost Basis Identification Methods

When you sell only part of your position, some rule has to decide which lots go. The choice reshapes your taxable gain.

First-In, First-Out (FIFO). The oldest lots sell first. This is the default at most brokers. It often produces long-term gains on old positions but also tends to close your cheapest shares, which enlarges the gain.
Last-In, First-Out (LIFO). The newest lots sell first, which often produces short-term gains.
Highest-Cost, First-Out (HIFO). Lots with the highest basis close first, minimizing the taxable gain per sale. Tax-conscious investors tend to favor it.
Lowest-Cost, First-Out (LOFO). The opposite of HIFO. Useful mainly in low-income years when long-term gains fall into the 0% bracket.
Specific Identification. You designate the exact lots to sell before or at the time of the transaction and keep records of that designation. This gives the most control.³
Average Cost. Total basis divided by total shares. Available only for shares in regulated investment companies — mutual funds, certain ETFs, and unit investment trusts. Individual stocks are not eligible.⁴

HIFO and LIFO aren’t separately named IRS methods the way FIFO and average cost are. Brokers implement them through valid specific identification, and the IRS accepts the result if you have contemporaneous records showing which lots were selected at the time of each sale.

Wash Sales Rewrite Your Open Lots

Selling a lot at a loss and buying the same or substantially identical security within 30 days before or after the sale (a 61-day window counting the sale date itself) triggers the wash sale rule and blocks the loss.⁵

The disallowed loss is added to the basis of the replacement shares, creating a new open lot with a higher basis. If you took a $250 loss and bought 100 replacement shares for $800, the replacement lot’s basis is $1,050.⁶ The replacement lot also inherits the original shares’ holding period, so it can qualify as long-term sooner than its own purchase date suggests.⁷

For investors running many lots across multiple accounts, wash sales are where errors accumulate quickly. An automatic dividend reinvestment in one account can void a loss you deliberately harvested in another. Lot-level tracking is the only reliable way to catch that before you file.

Corporate Actions That Change Your Lots

Stock Splits

A split changes your share count without changing total basis. In a two-for-one split, a lot of 100 shares with $1,000 basis becomes 200 shares still totaling $1,000, so per-share basis drops from $10 to $5. Each existing lot adjusts on its own terms.³ Reverse splits work the same way in reverse.

Spin-Offs

When a company spins off a subsidiary, you end up holding shares in two companies. Your original lot’s basis splits between the parent and the new entity in proportion to their fair market values right after separation. If the parent trades at $80 and the spin-off at $20 immediately after, 80% of the original basis stays with the parent lot and 20% moves to a new lot in the spin-off. Companies typically publish the allocation percentages on their investor relations pages.

Dividend Reinvestments

Dividend reinvestment plans buy additional shares automatically. Each reinvestment creates a fresh lot with its own date and price. Years of quarterly reinvestments can leave a single position with dozens of tiny lots at different bases. The dividend is still taxable income in the year received even though it was reinvested. Keeping the micro-lots organized matters because each one carries a distinct basis and holding period at sale.

Inherited Securities

Inherited investments generally reset. Basis steps up to the fair market value on the original owner’s date of death.⁸ Stock a parent bought at $10 that was worth $150 on the date of death starts, in your hands, at $150. Any gain or loss on inherited shares is automatically long-term, even if you sell the week after inheriting.⁷

One boundary to know: if the decedent received the property as a gift within one year before death and it passes back to the original donor or the donor’s spouse, no step-up occurs; basis stays at the decedent’s adjusted basis.⁸

Covered vs Non-Covered Lots

Federal law requires brokers to track and report basis to the IRS, but only for “covered” securities, and the covered dates depend on the instrument. Stock bought for cash in a brokerage account is covered if purchased after 2010. Mutual fund shares and other securities eligible for average cost became covered after 2011. Most debt instruments and options became covered after 2013, with more complex instruments after 2015. Shares received through corporate actions like splits stay covered if the original shares were.⁹

Anything bought before those dates is non-covered. The broker still reports the sale proceeds, but the basis field is blank or flagged as not reported. Your own lot records are the only defense in an audit for those positions.

Brokers report sales on Form 1099-B, showing gross proceeds, adjusted basis for covered lots, and whether the gain or loss is short-term or long-term. The form is generally issued by mid-February of the year after the trade.⁹ Keep your records for at least three years after filing the return that reports the sale, which matches the IRS’s standard assessment window.¹⁰ If you underreport income by more than 25%, the window extends to six years, so holding records longer is prudent for large positions.

Digital Asset Lot Tracking Starting 2026

Beginning January 1, 2026, cryptocurrency and other digital assets come under a broker basis reporting regime similar to the one that has applied to stocks. Final Treasury regulations issued in 2024 require brokers to report cost basis on digital asset transactions starting with the 2026 tax year.¹¹

One structural difference from stocks: lots must be tracked at the wallet or account level. Bitcoin held across three exchanges can’t be pooled into one basis calculation; each wallet or account is its own tracking unit. The IRS accepts FIFO and specific identification, with FIFO as the default if no designation is made at the time of the transaction. HIFO or LIFO outcomes remain achievable, but only through valid specific identification with contemporaneous records.

If you traded crypto before 2025, transitional IRS guidance allows you to allocate existing basis to the units held in each wallet as of January 1, 2025.¹¹ Getting the allocation right now avoids problems when you eventually sell.

Closing a Lot at the Point of Sale

Most brokerage platforms let you view every open lot for a security and choose which ones to close at the time of the sell order. This is where the tracking pays off: each lot’s basis, holding period, and short- or long-term status is visible before you commit. Skip the selection and the broker’s default method applies, almost always FIFO.

Your lot designation has to be locked in by settlement. As of May 28, 2024, the standard U.S. settlement cycle is one business day after the trade, known as T+1.¹² The window is short, so in practice most investors designate lots when placing the order rather than waiting. After settlement, the closed lots leave your open list, and any remaining open lots continue with their original dates and bases intact.

1
Investor.gov. CUSIP Number
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Internal Revenue Service. Stocks (Options, Splits, Traders)
4
Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property Cost
5
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
6
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
7
Office of the Law Revision Counsel. 26 USC 1223 – Holding Period of Property
8
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
9
Internal Revenue Service. Instructions for Form 1099-B (2026)
10
Internal Revenue Service. Topic No. 305, Recordkeeping
11
Internal Revenue Service. Final Regulations and Related IRS Guidance for Reporting by Brokers on Sales and Exchanges of Digital Assets
12
U.S. Securities and Exchange Commission. Shortening the Securities Transaction Settlement Cycle