FIFO (first in first out) ----> Sells your oldest shares first
LIFO (last in first out) ----> Sells your most recently purchased shares first
Highest Cost ----> Sells your shares with the highest cost basis first
Low Cost ----> Sells your shares with the lowest average first
Dollar cost averaging is key when accumulating shares of a particular company. This process becomes completely thrown off the moment we start to sell at a profit IF we are limited to FIFO only. Below I will illustrate the necessity of utilizing alternative tax lots.
Buy 100 DKNG at 35 on 11/02 (loading up on a long term position) $3500
Buy 100 DKNG at 45 on 1/05 (adding to long term position) $4500
Total - $8000
Buy 100 DKNG at 55 on 2/23 (adding for swing trade) $5500
Buy 100 DKNG at 60 on 3/05 (adding for swing trade) $6000
Total - $11,500
First thing to note is we currently would have an average price of 48.75. Lets say DKNG runs to 80 for the sake of our example. The price is now $80 and we would like to begin taking profits. Note that we are trading around a core long-term position. By unloading shares, we are also unloading risk. We want to unload the riskiest shares first. By doing this, we are able to hold on to our oldest and also our cheapest shares (the lot purchased at 35 and 45). We will sell 200 shares at 80 using the Highest Cost method. This will sell all 200 shares purchased at 55 and 60. We would lock in $4500 in profit and would see our average lower to 40 as we no longer own shares at 55 or 60.
With $4500 locked in profit, we have effectively lowered our cost for the remaining shares from 8k to 3500. We can do this over and over until the position is free. Obviously if you blow the profits on another ticker it will not work this way. I like to roll the profits back in to the same ticker on a nice dip and repeat the process.
Had we been using the FIFO tax lot method, we would have been forced to sell our shares averaged at 35 and 45 first. Sure this would lock in a slightly larger gain, but it would also inch up your cost basis to 57.50. Every time you do this, you raise your average and your risk becomes greater. For a long term hold you want to keep the best average possible. This keeps your risk low. By selling your most expensive shares first, you will always be passing that risk along to someone else at a profit and will remain exposed to the asset you wish to own.
Submitted March 18, 2021 at 10:16PM by mrfilthynasty4141 https://ift.tt/2OPUFij
