At 68 She’ll Sell $100,000 of a Fund She’s Bought Every Month for 20 Years. Which Shares She Tells the Brokerage to Sell Can Change Her Tax Bill by Thousands

Quick Read

• Choosing highest-cost shares first over FIFO on a $100,000 fund sale cuts federal tax from $10,900 to $2,000, a savings of $8,900.

• Lot selection must be locked in before trade settlement; mutual fund investors lose the option if they already used average cost on a prior sale.

• Selling high-cost shares first can keep income below Medicare’s $109,000 surcharge threshold, avoiding roughly $2,900 in extra annual premiums.

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She logs into her brokerage account, types $100,000 into the sell box for the index fund she’s bought every month for 20 years, and clicks submit. The trade goes through in seconds, but the screen never asked her the one question that sets her tax bill: which shares?

She’s 68, single, retired, and the fund sits in a taxable brokerage account, so this sale shows up on this year’s return. Lots of people are in her spot. Households led by people aged 55 to 69 hold about 39% of all stock and mutual fund shares owned outside workplace retirement plans, according to Federal Reserve data. Many built those positions one automatic purchase at a time.

Every Monthly Purchase Created Its Own Tax Lot

Each monthly buy created a separate batch of shares with its own price and date. The tax world calls each batch a tax lot. What she paid for a lot is its basis. Her gain is the sale price minus the basis of whichever lots get sold. Her early shares cost far less than her recent ones, so the lots that go out the door decide how big her gain is.

Brokerages generally use one of three methods:

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• First in, first out (FIFO): the oldest shares go first. It’s also the IRS default for stock when the seller doesn’t identify shares (26 CFR 1.1012-1(c)(1)).

• Average cost: every share gets the same blended price. Many brokerages and fund companies use it as the default for mutual funds.

• Specific identification: the seller picks the lots. Highest-cost-first is an automatic version that sells the costliest lots first.

Same $100,000 Sale, Three Very Different Tax Bills