1

I recently found out that my broker uses FIFO (first in, first out) accounting when I sell shares by default (as apparently do most brokers), whereas I had hoped for LIFO (last in, first out) accounting.

The reason this is bad is because, for example, I bought 100 shares of XYZ at $80 in 2015 and, in my mind, I've held them ever since. They're now at $140. But since that time, I have on many occasions bought and sold an extra 100 or 200 shares for small gains and losses.

Using LIFO accounting, I've never sold that original 100 shares, and my realized gains in 2016 are very small. But using FIFO, they are long gone, and I have significant gains according to my broker.

Brokers automatically report cost basis to the IRS since 2011. So I guess the IRS is expecting me to pay short term gains taxes on those "profits". Moreover, I have a huge amount of disallowed wash sales due to this kind of trading. It seems that every profit is booked, and every loss is disallowed.

Am I allowed to do my own accounting of the trades in order to avoid paying taxes on gains I haven't actually realized? If I can account by LIFO then I will pay almost no tax for the year on that stock.

Edit:

Form 8949 allows for adjustments to "mistakes" made by your broker in reporting your cost basis. But mine simply used different accounting than I wanted.

3

No. If you didn't specify LIFO on account or sell by specifying the shares you wish sold, then the brokers method applies.

From Publication 551

Identifying stock or bonds sold. If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Pub. 550.

The trick is to identify the stock lot prior to sale.

  • I assume that's true, but I can't find any documentation specifying that. Do you have a source? – Buttle Butkus Apr 3 '17 at 2:00
  • I added a quote and link to source. I left in the reference to Pub 550 ch 4, but that doc didn't impress me as clarifying further. – JoeTaxpayer Apr 3 '17 at 9:56

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