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Consider I made 3 transactions in 3 different months (bought 100 shares twice and then sold 150) and the quote for the asset was, respectively, $10, $20 and $3.

Which is the "correct" profit I have when I sold 150 shares: $2,000.00 or $2,250.00?

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  • The profit on your positions isn't the same as tax accounting. The accounting choices offer you different ways to determine taxation (FIFO, designation, weighting). Regardless of how you do your accounting, the actual profit is the same.
    – Bob Baerker
    Nov 17, 2020 at 21:44

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You have described the 'First In First Out' and 'Weighted Average' method of costing your purchases. Both methods can correct, depending on what you are trying to achieve. If you have no specific intent in mind, this is slightly subjective.

For tax purposes, some countries allow or require you to use FIFO, and some allow or require you to use a weighted average method.

For a retail investor with no specific reason to choose FIFO, I suggest that the weighted average method is the most intuitive. If you have 10 shares of APPL and buy 10 more, the first 10 are comingled with the next 10 - they are 'fungible'. It is pointless to track those first 10 instead of just updating your weighted average cost as you go along, unless you have a specific need (ie: tax requirement or similar).

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  • Thank you for your reply. Just one further question: the "Algorithm A" actually would be of type FILO (First in, Last out). For taxes purposes, which one would be the most common: is FIFO or FILO?
    – Saulo
    Nov 17, 2020 at 21:31
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    @Saulo, it would be useful to know your country of taxation. In the US, I believe FIFO is the norm, but LIFO and WA are also acceptable. In the UK, I am certain that WA is the only accepted method; unless you enter a short position which you settle any part of within 30 days, in which case the short sale is matched with settlements within those 30 days; or unless shares are bought and sold on the same day, in which case they are all matched with each other regardless of order. Tax rules can be complex.
    – Jivan Pal
    Nov 18, 2020 at 6:31

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