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I've noticed that my brokerage (Wells Fargo) uses a different system to calculate my profits and losses, instead of the mental accounting I follow.

E.g.,

I buy 100 shares of stock A in July 2014 at $200 each.

Then, I buy 100 more shares of stock A in August 2014 at $100 each.

Then in September 2014 I sell 100 shares of stock A at $150 each.

Mentally, I've broken even on these shares (if I use the average cost of the shares), or made a loss of $50 (if I use the cost of the first batch of shares).

However, my brokerage reports this as a profit of $50 (it's using the cost of the last batch for reference).

Before my tax statement shows up at the end of the year, is there anything I can do to make my brokerage change how it calculates profits and losses? There must be various accounting standards (FIFO - first in first out, LIFO - last in first out, etc.)... and perhaps I can choose which one I want to follow?

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Each stock you sell corresponds to a stock you bought. For each stock you bought - there's a price that you paid.

If you bought 1 lot of 100 shares for $100 each, and another lot of 100 shares for $200 each - you don't have 200 shares at $150 each. No. What you have is 100 shares with $100 cost basis and 100 shares with $200 cost basis.

The options you usually have (check with Wells Fargo which one is available for you) are:

  1. FIFO - this is usually the default if you don't select anything else.
  2. LIFO - last lot is selected first, if you chose this you may end up with unexpected short term gains.
  3. Specific lot - you explicitly chose which lot to use.
  4. Average purchase price - this is only available for mutual funds.

In your case, if you wanted to reach the "break even" result, you should have used the "specific lot" option and sell 50 shares from the first lot, and 50 shares from the second lot.

Be careful, in such a case, you may end up with short term gain and long term loss - which will not cancel each other out. If your first lot has been held for more than a year, but the second one wasn't, such a selection will yield $2500 short term gain (taxed at marginal rates) and $2500 long term loss. If you have other long term gains - the loss will first apply to them, leading to the short term gain being taxed at higher rates.

Bottom line - this isn't such a simplistic topic, and to fully grasp the complexities involved you will have to do even more research.

Check with your broker what tax cost basis options are available to you, and select the ones most beneficial.

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According to the IRS, there are 2 possibilities:

1) You can/do specify which shares were sold (i.e. "Sell the shares I bought at $200"). This needs to be done at the time of sale, and you need to receive confirmation. It sounds like you have missed the opportunity for this.

2) If you can't/don't specify which shares were sold, then it defaults to thirst shares you bought (FIFO).

Based on this, it seems to me that your broker made a mistake. I would contact a tax professional to confirm this and then contact your broker to have the records corrected.

  • more likely he made a LIFO selection at some point. When the rules took effect brokers proactively asked users to make a choice, and the OP has probably made the wrong one. – littleadv Nov 21 '14 at 17:34

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