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Series 7 practice questioneasyTax Implications — Cost Basis

If no cost basis method is specified when selling securities, the IRS default method is:

  1. ASpecific identification
  2. BAverage cost
  3. CFIFO (First In, First Out)✓ Correct answer
  4. DLIFO (Last In, First Out)
Explanation

Why C — FIFO (First In, First Out)

When an investor does not specify which shares to sell, the IRS default method is FIFO — the first shares purchased are assumed to be the first sold. This can result in higher taxable gains if earlier shares were purchased at lower prices. Investors who want to minimize taxes should consider using specific identification to sell higher-cost shares first.

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