Tax lot trading
Family X · Account mechanics
Not to be confused with lot, trading tax.
Tax lot trading is the practice of choosing which individual purchase lots are matched against a sale when a position is only partly liquidated. Because each lot carries its own acquisition date and cost basis, the selection determines the size and holding period of the realised gain or loss. Brokers commonly default to a first-in, first-out method, but many allow a different lot to be specified before or at the time of the trade.
How lot selection works
A position built through several purchases consists of separate tax lots. When a sale occurs, the broker must decide which lot or lots are deemed sold. Common default methods include first-in, first-out (FIFO), average cost for certain pooled holdings, and specific identification, where the trader names the lots. The method used affects the reported gain or loss, the holding period, and therefore the tax rate applied.
Specific identification is not available in every market or account type. Rules on when a lot must be identified, and whether the choice can be changed after execution, vary by jurisdiction and broker.
Worked example
Why it matters
Choosing a high-basis lot can reduce a realised gain or create a loss, while choosing a low-basis lot can increase it. Holding periods also differ: a lot held for more than a year may qualify for long-term treatment, while a lot held for less may be short-term. Tax lot trading therefore affects both the amount and the character of the taxable result.
Some brokers offer a default disposal method that applies unless the trader instructs otherwise. The available methods and the deadline for instructions vary by broker, country and account type.
Often confused with
- lot
- A lot is simply a batch of shares bought in one transaction, whereas tax lot trading is the act of choosing which lots a sale is matched against; the visible sign is that a lot exists without any sale, while tax lot trading requires a sale and a selection.
- trading tax
- A trading tax is a levy charged on transactions, such as a stamp duty, while tax lot trading concerns capital gains tax and the choice of cost basis; the visible sign is that a trading tax appears on the contract note at purchase, whereas tax lot trading appears only when a position is sold.