Cost Basis and Lot Selection
Every capital gain is a subtraction: what you sold for, minus what you paid. That second number — your cost basis — is quietly one of the most important figures in your investing life, because it decides how big the taxable gain is. And when you've bought the same stock at several different prices, you sometimes get to CHOOSE which shares you're selling, which means choosing your tax bill.
Cost basis starts as your purchase price plus any commissions — the true amount you put in. It adjusts over time: reinvested dividends add to it (you already paid tax on that money, so it counts as new basis), and certain events shift it. Track it correctly and you never pay tax twice on the same dollar; track it sloppily and you might. Your broker does most of this for you now, but knowing what basis IS keeps you from misreading the result.
Buy shares of one company across several dates and prices and you own multiple 'lots,' each with its own basis and its own holding-period clock. This is invisible until you sell only some of your shares — at which point the question becomes unavoidable: WHICH lot did you just sell? The answer changes both the size of your gain and whether it's short- or long-term.
Unless you say otherwise, brokers typically sell your oldest shares first — 'first in, first out,' or FIFO. But you can instead use 'specific identification': telling the broker exactly which lots to sell before the trade settles. That control lets you sell high-basis lots to shrink a gain, or pick long-term lots to get the lower rate. Specific-ID is one of the few genuinely free tax levers a small investor holds — but only if you set it before selling, not after.
Mutual funds allow an additional method — averaging the basis of all your shares into one number — which is simpler but takes away the lot-by-lot control specific-ID gives you. And a warning worth its own sentence: for a given holding, the method can be locked once you start selling, so it's a choice to make deliberately up front. Simplicity has a price here, and the price is flexibility.
Come tax season, your broker sends a Form 1099-B listing your sales, proceeds, and — for most shares bought in recent years, called 'covered' shares — the cost basis it tracked. Older 'noncovered' shares may report proceeds but leave the basis to you, which is exactly why your own records matter for anything held a long time. Read the 1099-B, don't just forward it: a wrong or missing basis means an overstated gain and an overpaid tax.
Basis is the number that decides the gain, lots are the same stock at different prices, and specific-ID is your free lever for choosing which to sell — all of it reconciled on the 1099-B you should actually read. Control your basis and you control a surprising amount of your tax bill.
Not financial advice · Educational only