FIFO or LIFO – which taxation method to choose?

When you’ve been investing for a longer time, you usually gathered equities (stock, ETFs, crypto-currencies) that you were adding to your portfolio at different prices. When you want to reduce some of these shares from your portfolio, picking which ones you want to sell or picking a computation method which will be used to calculate your gain can make a significant difference in the taxes you owe.

Regarding the tax amount, there are several methods used to calculate its value, among them FIFO and LIFO which were described in the earlier posts. The good news is that a proper selection of one of them may give you a significant benefit when it comes to tax payment. Let’s check out the following example:

FIFO and LIFO tax schema

You bought 5 stocks for 10 USD each and then bought another 5 stocks of the same company for 12 USD. After some time you decided to sell half of your stocks and the price which the market offers you is 12 USD per share. Should you sell the stock bought for 10 USD or 12 USD per share? If you used the FIFO method, you would sell the stocks bought at 10 USD and collect 10 USD gain before tax. Using the LIFO method, you would sell the stocks bought at 12 USD what doesn’t give you any profit so you don’t have to pay a tax.

But isn’t it better to use FIFO and have the profit even if you have to pay tax? The answer is – it depends. Firstly, the FIFO and LIFO don’t change the balance of your account. In both situations your will receive the same amount of money (5×12 USD= 60 USD) and you will still own 5 shares. The computation method affects only the taxation. If you use FIFO you will be taxed in the given year while using LIFO will postpone the tax payment. In both cases, you will pay the same tax amount unless there are some regulation related to different taxation of short and long term capital gains.

You can make your own calculation using our tool – just click in the link and the following data will be copied to Transcalc where you can calculate a tax using LIFO or FIFO method

2020-06-29-13.14.01;equity;B;5;10
2020-06-30-13.14.01;equity;B;5;12
2020-07-01-09.32.05;equity;S;5;12

Leave a Reply

Your email address will not be published. Required fields are marked *