How to Cut Taxes With the Right Cost Basis Method

Reading time: 5 minutes

Published: October 23, 2025

When you sell shares of a stock, ETF, or mutual fund, your broker uses a cost basis method to calculate gains or losses. Choosing the right cost basis method can help you cut taxes and simplify your recordkeeping without needing to be a tax expert.

The method you select can slightly change how much tax you owe when you sell investments. But unless you’re an active trader or harvesting losses for tax purposes, you don’t have to overcomplicate things.

You might have seen the acronym TIL (“Today I Learned”) on social media. Well, TIL that my broker, E*TRADE ↗ (and probably others), offers lot-selection methods I hadn’t noticed before, such as MinTax. Let’s take a closer look at what this and other cost-basis methods mean, and when each one makes sense to use.

What “Cost Basis” Means

Your cost basis is simply what you paid for an investment, including the price per share and any commissions or fees.

If you bought shares at different times and prices, each purchase is tracked as a separate lot. When you sell, your broker has to decide which lots you sold. That’s where cost basis methods come in.

The Default: FIFO (First In, First Out)

With FIFO, your oldest shares are sold first. It’s simple, automatic, and the default for most brokers.

For example:

• You bought 100 shares at $80.
• Then another 100 at $90.
• You sell 100 shares today at $95.

Under FIFO, your sale is matched to the first lot ($80). You realize a $15 gain per share, which is long-term if that first lot was held for more than one year, and short-term if it wasn’t.

If you prefer minimal hassle, and your investment’s price doesn’t bounce around much, FIFO works perfectly fine.

Specific Lot and “Lot Selector” Options

Brokers like E*TRADE let you use Specific Lot Identification, where you handpick which lots to sell.

This gives you flexibility:

• You can sell high-cost lots to minimize gains (tax-efficient selling).
• Or choose long-term lots to avoid short-term capital gains.

E*TRADE even allows you to pick lots after trade execution until 4 p.m. ET on the settlement date. If you forget to choose, it falls back to FIFO automatically.

For most investors, keeping “Specific Lot” as the global default offers the best of both worlds: flexibility when you want it, FIFO when you don’t bother to pick.

Other Automated Methods (MinTax, HIFO, LIFO)

Some brokers offer automated strategies:

• MinTax: sells shares that minimize your current-year tax bill. This method automatically prioritizes lots that reduce your taxable gains, selling losses before gains and favoring long-term gains (taxed at lower rates) over short-term ones.
• HIFO: sells the highest-cost shares first (reduces gains).
• LIFO: sells latest purchases first.

These are handy if you want automation, but on E*TRADE you typically must set them as your global preference; you can’t toggle them per trade.

Your Broker Does Most of the Work for You

If this all sounds like a lot to track, worry not. Your broker already keeps detailed records of every purchase and sale, including which lots were sold, whether each gain or loss is short- or long-term, and any wash-sale adjustments.

At tax time, you’ll receive a Form 1099-B (usually in February) that lists each transaction line by line. Those details flow directly into tax software like TurboTax or your accountant’s system. As long as you verify that your cost-basis method is set the way you want, the heavy lifting is handled automatically.

The “Average Cost” Method for Mutual Funds and ETFs

You might see another option called Average Cost. This applies only to qualified funds: mutual funds, ETFs, and Unit Investment Trusts ↗ (UITs) that qualify as Regulated Investment Companies (RICs) for tax purposes.

You can usually tell whether your investment qualifies as a RIC by checking its tax documents or prospectus. If it reports income on a Form 1099-DIV (not a Schedule K-1) and states that it’s registered under the Investment Company Act of 1940, it’s a RIC.

With average cost, all shares get the same cost basis (your total cost divided by total shares). It’s convenient but inflexible. Once you use it, you’re locked into it for that fund.

For low-volatility funds like bond funds, average cost and FIFO produce nearly identical results. But for more volatile equity funds, average cost removes your ability to harvest tax losses or control which gains you realize.

Selling All Shares at Once? Don’t Overthink It

If you sell 100% of a holding, the cost-basis method really doesn’t matter at all because you’re selling every lot. The total gain or loss will be the same no matter which method you pick.

Practical Takeaways

• Keep “Specific Lot” as your global default. You can still do FIFO, assuming it’s your default, just by not picking lots when you sell.
• Use MinTax or HIFO only if you want automation and are comfortable changing your global cost-basis preference before trading. These methods automatically choose which lots to sell for you, but you must enable them in your account settings before the trade is placed.
• Avoid Average Cost unless you’re holding a simple bond or index fund and value simplicity over control.
• If you sell everything, don’t worry; your cost basis method doesn’t change your total gain or loss.

For a deeper dive into how to strategically manage your investment losses, consider exploring our guide on tax-loss harvesting.

Conclusion

For most investors, simplicity wins. You don’t need to micromanage every lot in your portfolio. But understanding these methods can help you avoid unpleasant surprises at tax time and give you options if you ever want to fine-tune your gains or losses.

The key is to know what you’ve set as your default and how your broker handles trades when you do (or don’t) make a choice.