Tax Lot

Investors often build a position by buying the same shares or fund at different times and prices. Each purchase is a separate tax lot. When only part of the holding is sold, the investor or broker must decide which lots were sold, which affects the gain or loss.

For example, an investor bought 100 shares at 20 and later another 100 at 35. They now sell 100 shares at 30. If the first lot is treated as sold, the gain is 1,000. If the second lot is treated as sold, there is a loss of 500.

Common methods include first-in, first-out, which treats the oldest lots as sold first; average cost, often used for mutual funds; and specific identification, where the investor chooses the lots, which allows them to manage taxes, for example by selling high-cost lots to reduce gains.

The rules vary by country. In the United Kingdom, for example, shares of the same company are usually pooled at an average cost rather than tracked as separate lots. Brokers record lot information, but the chosen method must be applied consistently and in time.