The FIFO strategy is the most common way of calculating capital gains. It is often the default method used by accountants and people reporting their own taxes.
The strategy is simple. When calculating the capital gain, you process trades in order of the date you bought them.
The first share parcel bought = the first one out.
Let’s look at an example of FIFO:
Purchases:
- Buy 10 shares at $1 each — Total cost: $10
- Buy 10 shares at $5 each — Total cost: $50
Sale:
- Sell 10 shares at $4 each — Total sale value: $40
FIFO Calculation:
- First parcel: 10 shares at $1 each — Total cost: $10
- Sold 10 shares for $40
Capital Gain:
- Gain: $40 (sale value) -— $10 (cost) = $30
Since this is a capital gain, it is subject to capital gains tax.
A more complex FIFO example.
Suppose we buy the following parcels in company ABC:
- Buy 10 shares at $2 each — Total: $20
- Buy 5 shares at $5 each — Total: $25
- Buy 10 shares at $3 each — Total: $30
This gives us a total of 25 shares at different price points.
Now, let’s sell 13 shares at $4 per share using the FIFO (First-In-First-Out) method.
First Parcel (a):
- 10 shares at $2 each.
- Total cost: $20
- Sale value: 10 shares x $4 = $40
- Gain: $40 — $20 = $20
Second Parcel (b):
- Remaining 3 shares to be sold.
- Next parcel: 5 shares at $5 each.
- Cost for 3 shares: 3 shares x $5 = $15
- Sale value: 3 shares x $4 = $12
- Loss: $12 — $15 = -$3
Total Capital Gain:
- Gain from first parcel: $20
- Loss from second parcel: -$3
- Total gain: $20 — $3 = $17
Therefore, the total capital gain from selling 13 shares is $17.
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