Last updated: May 2026
Cost basis is one of the most important numbers on your brokerage statement. It helps determine the gain or loss shown when you sell an investment, and it can affect how your broker reports tax-related information.
The confusing part is that one investment position can contain several tax lots. If you bought shares at different times and prices, your broker needs a method for deciding which shares were sold. Common methods include FIFO, newest-lots-first, average cost, and specific identification.
Quick Answer: FIFO vs LIFO vs Average Cost
FIFO means first in, first out. The oldest shares are treated as sold first. LIFO, or newest-lots-first on many broker platforms, means the newest shares are treated as sold first. Average cost uses an average basis per share and is commonly associated with mutual fund shares when properly elected.
| Method | Basic Meaning | Common Use | Important Note |
|---|---|---|---|
| FIFO | Oldest shares sold first | Common default method | May use older lots unless you identify different shares |
| Newest-lots-first / LIFO-style | Newest shares sold first | Broker lot-selection setting | Depends on broker support and proper lot identification |
| Average cost | Average basis per share | Common for mutual funds | Usually requires correct election and recordkeeping |
| Specific identification | You choose exact lots sold | More controlled lot selection | Must be properly identified and confirmed |
What Is Cost Basis?
Cost basis is generally the amount you paid for an investment, adjusted when certain events occur. When you sell, your gain or loss is usually calculated by comparing sale proceeds with adjusted cost basis.
A simple formula is:
- Gain = Sale proceeds minus adjusted cost basis
- Loss = Adjusted cost basis minus sale proceeds
For example, if you bought 100 shares at $50 and later sold those shares at $60, the basic difference is $10 per share before considering commissions, adjustments, taxes, and other details.
Cost basis may also be affected by events such as stock splits, reverse splits, mergers, spin-offs, dividend reinvestment, return of capital, or cash-in-lieu payments. For related corporate action examples, see What Happens to Fractional Shares During Splits, Mergers, and Spin-Offs?.
What Is a Tax Lot?
A tax lot is a group of shares purchased on the same date and at the same price, or otherwise tracked together by your broker. If you buy the same stock several times, you may have several tax lots inside one position.
| Purchase Date | Shares | Cost per Share | Total Basis |
|---|---|---|---|
| January 10 | 100 | $50 | $5,000 |
| March 15 | 100 | $60 | $6,000 |
| June 20 | 100 | $70 | $7,000 |
If you later sell only 100 shares, your tax result can depend on which lot is treated as sold.
FIFO Method: First In, First Out
FIFO stands for first in, first out. Under FIFO, the oldest shares are treated as sold first.
FIFO is commonly used as a default method when you do not select specific lots or when your broker applies default treatment.
FIFO example
Suppose you bought:
- 100 shares at $10
- 100 shares at $15
- 100 shares at $20
If you sell 100 shares using FIFO, the $10 lot is treated as sold first.
| Method | Shares Sold | Lot Used | Basis Used |
|---|---|---|---|
| FIFO | 100 | Oldest lot | $10 per share |
When FIFO may appear
FIFO may appear when:
- You do not choose specific tax lots before or during the sale.
- Your broker’s default disposal method is FIFO.
- The security or account type does not support another method.
- Your lot selection was not properly confirmed.
FIFO is simple, but it may not always match what you assumed was being sold. That is why checking your broker’s trade confirmation and tax lot screen matters.
Newest-Lots-First: What Brokers May Call LIFO
Some broker platforms offer a setting called LIFO or “last in, first out.” In a brokerage context, this often means the newest shares are selected first.
It is important to understand that tax treatment depends on proper lot identification and broker confirmation. Do not assume that a label alone controls the tax result. Check your broker’s rules and records.
Newest-lots-first example
Suppose you bought:
- 100 shares at $50
- 100 shares at $60
- 100 shares at $70
If you sell 100 shares using a newest-lots-first instruction, the $70 lot may be treated as sold first, assuming the broker supports and confirms that selection.
| Method | Shares Sold | Lot Used | Basis Used |
|---|---|---|---|
| Newest-lots-first | 100 | Newest lot | $70 per share |
What to verify
Before relying on this method, check:
- Whether your broker supports newest-lots-first for that security.
- Whether your account type allows lot selection.
- Whether the order ticket shows the selected lots.
- Whether the trade confirmation matches your intended selection.
Average Cost Method
Average cost, also called average basis, calculates one average cost per share across eligible shares. It is commonly associated with mutual funds and may require a proper election under tax rules.
Average cost example
Suppose you bought:
- 100 shares at $10
- 100 shares at $20
Your total basis is $3,000 and your total shares are 200.
| Total Basis | Total Shares | Average Cost per Share |
|---|---|---|
| $3,000 | 200 | $15 |
If you sell 50 shares using average cost, the basis used in this simplified example would be $15 per share, subject to the applicable rules.
Where average cost is commonly used
Average cost is most commonly used with mutual fund shares. It may not be available or appropriate for every security type. Your broker’s cost basis settings and official tax guidance should be used to confirm whether it applies.
Specific Identification
Specific identification means choosing exactly which tax lots are sold. This can give more control, but it also requires accurate records and proper broker confirmation.
For example, if you bought three lots at $50, $60, and $70, specific identification may allow you to choose which lot is sold, depending on broker support and timing requirements.
Why specific identification matters
Specific identification can matter because different lots may have different:
- Purchase prices
- Holding periods
- Unrealized gains or losses
- Tax reporting effects
- Corporate action adjustments
The key is documentation. If you choose specific lots, save the order confirmation, trade confirmation, and any broker record showing which lots were selected.
Cost Basis vs. Cost Flow Accounting
Terms like FIFO, LIFO, and average cost are also used in inventory accounting, but securities tax reporting is different from business inventory accounting.
For investments, the important question is usually which tax lots were sold and whether they were properly identified. That is why brokerage records, confirmations, and tax documents matter more than general accounting labels.
How Your Broker Shows Cost Basis
Most broker platforms show cost basis in the holdings, positions, tax lots, or unrealized gain/loss section. The exact layout depends on the broker.
You may see fields such as:
- Cost basis
- Adjusted cost basis
- Average cost
- Tax lots
- Acquisition date
- Holding period
- Unrealized gain or loss
- Disposal method
- Lot selection
If you are not sure where to find these items, review your monthly statement and tax documents. For a practical statement walkthrough, see How to Read a Monthly Brokerage Statement.
How Corporate Actions Can Change Cost Basis
Corporate actions can make cost basis harder to read. Your broker may adjust share count, per-share basis, total basis, or security identifiers after the event.
Events that may affect cost basis records include:
- Stock splits
- Reverse stock splits
- Mergers
- Spin-offs
- Return of capital
- Dividend reinvestment
- Cash-in-lieu payments
For reverse splits, see Reverse Stock Splits Explained. For spin-offs, see Spin-Offs 101: How New Tickers Are Created.
Cost Basis and Ticker Changes
A simple ticker change usually does not change cost basis by itself. The same security may simply appear under a new symbol. However, if the ticker change is connected to a merger, spin-off, split, or restructuring, cost basis may need closer review.
When a ticker changes, compare the company name, CUSIP, ISIN, effective date, and broker corporate action notice. For help with this process, see How to Track a Stock After a Ticker Change.
What to Check Before and After a Sale
This checklist is not a recommendation to buy, sell, or hold. It is a recordkeeping checklist for understanding how cost basis may be reported.
Before selling
- Check your broker’s default cost basis method.
- Review available tax lots.
- Confirm whether specific lot selection is supported.
- Check whether any corporate actions affected basis.
- Save screenshots or confirmations if you select specific lots.
After selling
- Review the trade confirmation.
- Confirm which lots were reported as sold.
- Check realized gain or loss information.
- Save the monthly statement showing the activity.
- Compare year-end tax forms with your records.
Common Cost Basis Mistakes
Assuming the broker sold the lot you had in mind
If you do not select a lot, the broker may use the default method. That default may not match your assumption.
Ignoring transferred positions
When securities move from one broker to another, basis information may transfer late or display incorrectly. Keep your original statements and confirmations.
Forgetting corporate action adjustments
Splits, mergers, spin-offs, and cash-in-lieu payments can affect basis records. Keep corporate action notices and tax documents.
Confusing ticker changes with taxable events
A ticker change may only be a symbol update. But the event behind the ticker change matters, especially if it involved a merger or restructuring.
Relying only on one screen
Broker platforms may show summary basis in one place and tax-lot details elsewhere. Review the full cost basis or tax-lot section before relying on the number.
Conclusion
Cost basis methods help determine which shares are treated as sold and how gains or losses are calculated. FIFO usually uses the oldest shares first. Newest-lots-first uses newer lots when properly supported and selected. Average cost is commonly used for mutual fund shares when properly elected. Specific identification can give more control, but only when the lots are properly selected and confirmed.
The safest approach is to keep records. Save trade confirmations, monthly statements, tax forms, corporate action notices, and any broker confirmation of lot selection. When tax treatment is unclear, use official IRS guidance and qualified tax help.
For the most accurate details about your own account, rely on your broker’s official cost basis records, trade confirmations, tax documents, IRS guidance, and qualified tax advice as primary sources.
Sources and Further Reading
- IRS Publication 550 — U.S. tax guidance on investment income, capital gains and losses, basis, and average basis topics.
- 26 CFR § 1.1012-1: Basis of Property — Regulation covering basis rules, adequate identification, and related provisions.
- FINRA: Your Brokerage Statement — Investor guidance on reviewing brokerage statements and account records.
- SEC EDGAR — Search official company filings related to mergers, spin-offs, stock splits, and corporate actions.
- FINRA: Corporate Actions by Public Companies — Explains corporate actions and how they can affect investor records.
FAQ
What is cost basis in simple terms?
Cost basis is generally what you paid for an investment, adjusted for certain events. When you sell, your gain or loss is usually calculated by comparing sale proceeds with adjusted cost basis.
What is FIFO?
FIFO means first in, first out. The oldest shares are treated as sold first, often as the default method when no specific lots are selected.
What does LIFO mean on a brokerage platform?
Many brokers use LIFO to mean newest shares first. In practice, tax treatment depends on whether the lots were properly identified and confirmed under the applicable rules.
When is average cost used?
Average cost is commonly used for mutual fund shares when properly elected and calculated under applicable tax rules. It may not apply to every security type.
What is specific identification?
Specific identification means choosing the exact lots to sell. It requires accurate broker support, proper selection, and documentation.
Can a stock split change cost basis?
A stock split usually changes per-share basis because the same total basis is spread across a different number of shares. Your broker may adjust the records automatically, but you should verify them.
Can a ticker change affect cost basis?
A simple ticker change usually does not affect cost basis by itself. If the ticker change is connected to a merger, spin-off, split, or restructuring, basis may need closer review.
Where can I find my cost basis?
Start with your broker’s holdings, positions, tax lots, trade confirmations, monthly statements, and year-end tax forms. If records look wrong, contact your broker for clarification.