Easy Money: The Tax Lot Trick

Say you bought 100 shares of a stock at $10.

Later, you bought another 100 shares at $20.

Now the stock is worth $30, and you want to sell 100 shares for $3,000.

Now here's the thing: Your broker shows you 200 shares at $15 "average cost" and a total cost of $3,000 for this position ($1,000 from the first trade + $2,000 from the second).

But this is not how it works. The IRS doesn't know "200 shares at $15 average cost". There's no such thing.

For the IRS you have two separate tax lots:

• 100 shares bought at $10 = $1,000 cost

• 100 shares bought at $20 = $2,000 cost

And the IRS wants to know: which tax lot are you selling? Because I want my share of your profit!

Different tax lots - different tax bill.

Let’s assume, just for this example, that your tax rate on the gain is 25%.

If you sell the shares you bought at $10, your gain is $2,000.

Estimated tax: $500

If you sell the shares you bought at $20, your gain is only $1,000.

Estimated tax: $250

Same stock.

Same 100 shares sold.

Same $3,000 in cash.

But potentially $250 less in taxes.

That’s why tax lots matter.

So who chooses which shares get sold?

You do.

When you place a sell order, your brokerage lets you choose the specific tax lot you want to sell. Look for options such as “tax lots,” “specific shares,” or “cost basis method.”

If you don’t choose, your broker will use its default method.

One common default is FIFO: first in, first out.

In our example, FIFO would sell the shares purchased first — the $10 shares — creating the larger taxable gain.

Wait, it gets better.

Your investment can be up while one tax lot is down

Tax lots become even more interesting when you’ve bought the same investment several times.

Imagine your position is profitable overall.

Great.

But maybe one batch of shares was purchased near the stock’s peak and is currently sitting at a loss.

That individual losing tax lot may potentially be useful for tax-loss harvesting, even though your overall position is still profitable.

In other words:

A winning investment can contain a losing tax lot.

That’s one of the things CGai looks for.

Why is CGai asking me about missing tax lots?

When you connect your brokerage account to CGai, your broker sends us information about your holdings.

Sometimes, however, the tax-lot information we receive is incomplete.

Without complete tax-lot data, CGai reliably identify potential tax opportunities for that position. There may be great opportunities for you to cut your tax bill; we don't know!

That’s why you may receive notifications from the app asking you to fill in missing information.

How to fix missing tax lots

Find the position CGai flagged and tap the yellow "Fix tax lots" button.

You’ll have three options:

1. Ignore it

The easiest option, but CGai won’t be able to fully analyze that position.

2. Enter the missing tax lots manually

Best if only a small amount of information is missing.

3. Send CGai your transaction history file

Best if many tax lots are missing. One file may help fill in missing information across multiple positions.

To find the file, log in to your broker’s website and look for something like Transaction History or Account History, then download the information to Excel or CSV.

CGai includes instructions in the app, and we’ve also prepared step-by-step videos for some brokers.

The takeaway

Shares of the same stock may look identical in your account, but for tax purposes, they may be very different.

They can have different purchase prices, different gains or losses, and different holding periods.

Those are your tax lots.

Before you sell, it’s worth knowing which ones you’re selling.

And if CGai tells you some tax-lot information is missing, filling in those gaps can help CGai do a better job of finding opportunities for you.

Tax treatment depends on your individual circumstances. CGai does not provide tax advice; consult a qualified tax professional regarding your specific situation.