Lesson 5 of 25 · 7 min

Lot identification, and why the default is not the specific lot

Shares are fungible to the market and are not fungible to the arithmetic; an ordering rule decides which ones left.

When you hold the same security bought at several different times, the shares are identical and their basis figures are not. Something has to decide which of them left.

That something is usually a convention rather than a fact. Many systems permit a specific identification — naming the lot at or before the transaction — and apply a default ordering when no identification is made. The most common default takes the oldest shares first. In a long-held position the oldest shares are usually the ones carrying the lowest basis, so the default and the largest recognised gain tend to arrive together.

The timing constraint is the part people miss. An identification generally has to exist at or before the transaction and generally cannot be supplied afterwards from a spreadsheet. A sale settled under the default is characterised under the default, whatever anyone later wishes had been recorded.

Three lots: 900 shares at $14.20, 1,450 at $63.80, and 700 at $119.35. The price is $131.90 and 900 shares are sold, so proceeds are $118,710. Under an oldest-first default the basis is 900 × $14.20 = $12,780 and the gain is $105,930. Identifying the 700 newest shares plus 200 from the middle lot gives a basis of $83,545 + $12,760 = $96,305, so the gain is $22,405. Same proceeds, same day, $83,525 of difference.

Track 1 lesson 18 made a related point from the direction of a forced sale, where the selection is not the holder's to make. Here it is, and it is made by an account setting rather than by a decision anyone remembers taking. Whether a specific identification is available to a particular holder, and what it requires, is a question for their own adviser.

Key terms

Tax lot: A block of shares with its own acquisition date and its own basis, even where the shares are indistinguishable from every other share held.
Specific identification: Naming which lot is being disposed of, at or before the transaction. Where it is permitted it displaces the default ordering.
Default ordering: The rule that applies when no identification was made. Oldest-first is the most common, and in a long-held position it usually selects the lowest basis.

Worked example

Same 900 shares, two orderings

Lots of 900 at $14.20, 1,450 at $63.80 and 700 at $119.35. The price is $131.90 and 900 shares are sold.

Proceeds: $118,710
Basis under an oldest-first default: $12,780
Gain under the default: $105,930
Basis if 700 newest plus 200 from the middle lot are identified: $96,305
Gain under that identification: $22,405
Difference in recognised gain: $83,525

Nothing about the trade changed. The only variable was a naming step that had to happen before the sale rather than after it.

Check yourself

You sell 900 shares at $131.90 out of lots of 900 at $14.20, 1,450 at $63.80 and 700 at $119.35, and no identification was made. What is the recognised gain, and how much larger is it than the best-identified alternative?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.