Tax Lot Accounting

Written By
Paul Tracy
Updated July 18, 2021

What is Tax Lot Accounting?

Tax lot accounting is a method of record keeping that tracks the cost, purchase date, and sale date for every unit of every security in a portfolio.

How Does Tax Lot Accounting Work?

For example, let's assume that you purchase 50 shares of Company XYZ at $5 a share on January 1. You purchase another 100 shares of Company XYZ on January 5 for $6 per share.

On December 15, you sell 20 shares of Company XYZ for $10 per share. Which shares, exactly, did you sell? The $5 shares or the $6 shares? Tracking securities by tax lot helps determine the answer. Your financial institution will provide documents that help you do this.

Why Does Tax Lot Accounting Matter?

Tax lot accounting is important because it helps investors minimize their capital gains taxes. In our example above, we sold 20 shares of Company XYZ for $10 per share. If those shares were the $5 shares, then the profit is $100 and we would pay taxes on $100. But if the shares sold were the $6 shares, then the profit is only $80, and we would pay less in taxes. In some cases, investors may record a gain or a loss on a security depending on the tax lot involved, which adds even more flexibility from a tax perspective.

It is important to note that the law requires brokerage firms to report the original cost basis data (tax lot data) to the IRS, along with a 1099-B, which provides information about the gross proceeds of a transaction. This helps the IRS determine whether people are reporting the correct cost basis of the securities when they sell.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Tax Lot Accounting.
Be the first to ask a question

If you have a question about Tax Lot Accounting, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Tax Lot Accounting, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Tax Lot Accounting

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms