Tax lots are the individual records your brokerage keeps for each separate purchase of a security. Every time you buy shares of a stock, bond, mutual fund, or ETF, a new lot is created that tracks the purchase date, the number of shares, the price you paid, and any transaction costs. Those details matter because when you later sell part of your holdings, the specific lot the shares come from determines your cost basis, your holding period, and ultimately how much tax you owe.
What Each Lot Records
A tax lot captures four things: the acquisition date, the number of shares or units, the price per share, and any transaction costs such as commissions and regulatory fees. Those costs get folded into the lot’s total cost, which raises your cost basis above the raw share price. That combined figure is the starting point for measuring gain or loss on a sale.
Every purchase creates its own lot, even if you buy the same security repeatedly. Shares of a company bought in January 2024 at $50 sit in a completely different lot from shares of that same company bought in June 2026 at $72. Different cost basis, different holding period, different tax outcome when you sell.
Why the Lot You Sell Changes Your Tax Bill
When you sell shares, the IRS compares the sale proceeds against the cost basis recorded in the tax lot. Sell at $80 with a lot basis of $50, and you have a $30 per-share capital gain. The rate that gain is taxed at depends on the holding period stored in that same lot.
Short-Term Versus Long-Term Rates
Shares held one year or less produce short-term capital gains, taxed at ordinary income rates that reach as high as 37% for top earners. Shares held more than one year produce long-term capital gains, taxed at 0%, 15%, or 20% depending on your taxable income. For a single filer in 2026, the 0% long-term rate applies up to $49,450 of taxable income, 15% applies up to $545,500, and 20% applies above that. Married couples filing jointly get wider brackets, with 0% up to $98,900 and 15% up to $613,700.
The gap between ordinary rates and long-term rates can cut the tax on the same dollar of gain roughly in half. That is why the acquisition date recorded in every lot matters as much as the price.
The Extra 3.8% for Higher Earners
Higher-income investors may also owe the 3.8% net investment income tax on capital gains. The NIIT kicks in when modified adjusted gross income exceeds $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately. Layered on the 20% long-term rate, it produces an effective rate of 23.8% at the top.
Losses and the $3,000 Rule
Selling a lot at a loss offsets capital gains dollar for dollar. If losses exceed gains for the year, you can deduct up to $3,000 of the excess against ordinary income ($1,500 if married filing separately). Anything left over carries forward to future years indefinitely. Which lots you sell, and when, controls both the size and the timing of these gains and losses.
Methods for Choosing Which Lot to Sell
When you sell only part of your position, someone has to decide which lot the shares came from. Most brokerages let you pick a method, and the choice can move your tax bill meaningfully.
First-In, First-Out
FIFO treats your oldest shares as the ones sold first. It is the default method most brokerages apply unless you specify otherwise, and it is what the IRS assumes if you cannot adequately identify the shares. In a market that has risen over time, FIFO tends to sell your lowest-basis shares, which produces a larger taxable gain but is more likely to qualify for long-term rates.
Last-In, First-Out and Highest-In, First-Out
LIFO sells your most recently purchased shares first. HIFO ignores purchase date and sells the lot with the highest cost basis, whenever it was bought. Both methods usually shrink the reported gain because the higher-cost shares get matched against the sale price. The catch is that the shares you sell may be short-term, taxed at ordinary income rates. Whether the tradeoff helps depends on your overall tax picture.
Specific Identification
Specific identification gives you the most control. You pick the exact lot by purchase date and price. The IRS allows this as long as you identify the shares at the time of the trade and your broker confirms the selection. If you hold many lots, this method lets you fine-tune both the size of the gain or loss and whether it is short-term or long-term.
Average Cost for Mutual Funds
For mutual fund shares (and certain dividend reinvestment plan shares), you can elect the average cost method. Add up the total cost of all shares you own in the fund, divide by the number of shares, and use that average as the basis for each share sold. You must affirmatively elect it, and once elected for a fund it generally applies to all shares of that fund going forward. Average cost is not available for individual stocks.
Using Lot Selection to Harvest Losses
Tax-loss harvesting relies directly on tax lot accounting. If you own five lots of the same stock and two are underwater, specific identification lets you sell just those losing lots while leaving the profitable ones alone. The realized losses offset gains from other sales in the same year, reducing your current tax bill. Without lot-level cost basis data, this kind of selective harvesting is impossible. Many brokerages now flag lots trading below their cost basis to make the opportunity easier to spot.
The Wash Sale Trap
If you sell a security at a loss and buy a substantially identical security within 30 days before or after the sale, the wash sale rule disallows the loss. The disallowed amount is not lost forever. It gets added to the cost basis of the replacement shares, creating a new lot with a higher basis. Sell shares at a $500 loss and buy replacements for $2,000 inside the 30-day window, and the new lot’s basis becomes $2,500. You recover the deferred loss when you eventually sell those replacement shares.
Your broker tracks and reports wash sales within the same account for the same security, and any disallowed loss shows up in Box 1g of Form 1099-B. But the rule also applies across accounts, including IRAs and a spouse’s accounts, and your broker generally does not track those situations. Harvest a loss in a taxable account while buying the same security in your IRA within 30 days, and the loss is still disallowed. Inside an IRA the basis adjustment gives you no future benefit at all.
Inherited and Gifted Lots
Lots you receive from someone else follow different basis rules.
Inherited Securities
Inherited securities generally get a stepped-up basis equal to fair market value on the date the original owner died. If your parent bought shares for $10,000 and they were worth $80,000 at death, your new lot’s basis is $80,000, and the $70,000 of unrealized gain is never taxed. The executor may instead elect an alternate valuation date six months after death if that reduces the estate’s total value.
Inherited lots also qualify automatically for long-term capital gains treatment, regardless of how long the original owner or the estate held them. Sell the day after inheriting, and any gain above the stepped-up basis is still taxed at long-term rates.
Gifted Securities
Gifts follow a carryover basis rule instead. You take over the donor’s original cost basis and measure your gain from what they paid. If the donor’s basis was $5,000 and you sell for $12,000, your taxable gain is $7,000. If the fair market value at the time of the gift was less than the donor’s basis and you later sell at a loss, you use that lower fair market value as your basis for the loss calculation. This prevents shifting built-in losses to a recipient in a better tax bracket.
Your holding period also picks up where the donor’s left off, as long as you use the carryover basis for your gain calculation. Three years of the donor’s ownership counts toward your holding period, which can qualify the shares for long-term treatment right away.
How Corporate Actions Rewrite Your Lots
Companies sometimes change the data inside your existing lots without you buying or selling anything.
In a stock split, the number of shares in each lot increases by the split ratio and the basis per share decreases by the same ratio. A 2-for-1 split on a lot of 100 shares at $60 gives you 200 shares at $30. Total basis stays at $6,000, and your original purchase date carries over to all the new shares.
Mergers and spin-offs are more involved. When a company you own spins off a subsidiary into a new public company, your original lot’s basis gets divided between the parent shares and the new company shares, usually based on the relative fair market values right after the separation. The company is required to file IRS Form 8937 documenting how investors should adjust their basis. Your broker typically handles the math, but the Form 8937 filing is worth reviewing to verify what happened.
What Your Broker Reports and What You Own
Brokers are required to report cost basis to you and the IRS for “covered” securities, which include stocks bought on or after January 1, 2011, mutual fund and DRIP shares bought on or after January 1, 2012, and most bonds and options bought on or after January 1, 2014. For covered securities, Form 1099-B shows the acquisition date, cost basis, and whether the gain or loss is short-term or long-term.
For older “noncovered” securities purchased before those dates, brokers may report basis but are not required to. The IRS still holds you responsible for reporting it correctly. If you own securities from before those cutoffs, your own records of the original purchase prices are what you have to work from.
When you sell, each transaction generally gets its own line on Form 8949, though a block of shares from multiple lots sold in one trade can be entered with “VARIOUS” as the acquisition date. Short-term and long-term sales go in separate sections. If your 1099-B basis is correct and needs no adjustments, you can bypass Form 8949 for those covered sales and enter totals directly on Schedule D. Adjustments, such as correcting a cross-account wash sale your broker missed or fixing the basis of a gifted security, get reported in column (f) of Form 8949. Keeping your own lot records is especially important for noncovered securities and for any wash sale spanning accounts, because the IRS treats you as responsible for the correct number regardless of what the 1099-B says.