This is a crucial topic for many investors, as your cost basis method can significantly impact your tax liability. While E*TRADE defaults to FIFO (First-In, First-Out), you can change this, and understanding how and why is key.
Navigating Your Investments: How to Change from FIFO to LIFO on E*TRADE
Ever wonder how your investment gains and losses are calculated when you sell shares? Most likely, your brokerage, including ETRADE, defaults to the First-In, First-Out (FIFO) method. But what if you could strategically choose which shares you sell to potentially reduce your tax bill? This is where the Last-In, First-Out (LIFO) method, or even specific lot identification, comes into play. This comprehensive guide will walk you through the process of understanding, and potentially changing, your cost basis method on ETRADE, empowering you to make more informed tax-aware trading decisions.
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| How To Change Fifo To Lifo On Etrade |
Understanding Cost Basis Methods: FIFO vs. LIFO
Before we dive into the "how-to," let's clarify the fundamental differences between FIFO and LIFO and why they matter for your investments.
What is Cost Basis?
Your cost basis is essentially the original value of an asset for tax purposes. It includes the purchase price of the security plus any commissions, fees, or other adjustments. When you sell a security, your capital gain or loss is calculated by subtracting your cost basis from the selling price.
FIFO (First-In, First-Out)
The Default: FIFO is the most common and often the default cost basis method for brokerages like E*TRADE. It assumes that the first shares you bought are the first shares you sell.
How it Works: Imagine you bought 100 shares of Company X in January at $10/share, and another 100 shares in March at $15/share. If you sell 100 shares, FIFO dictates that you're selling the shares you bought in January for $10, even if you bought them earlier.
Tax Implications: In a rising market, FIFO generally leads to higher capital gains because you're selling older, typically lower-cost shares first. This can mean a higher tax liability.
LIFO (Last-In, First-Out)
The Opposite Approach: LIFO assumes that the last shares you bought are the first shares you sell.
How it Works: Using the same example, if you sell 100 shares, LIFO would assume you're selling the shares you bought in March for $15.
Tax Implications: In a rising market, LIFO can be advantageous for tax purposes as it typically results in lower capital gains (or even higher losses) because you're selling the most recently acquired, and often more expensive, shares first. This can lead to a lower tax bill. However, it's important to note that LIFO is generally not allowed for tax purposes for inventory in most countries outside the US, and even within the US, its application to investments can be complex and may not always be the most beneficial strategy.
QuickTip: Re-reading helps retention.
Specific Lot Identification (SLI) or Highest Cost First-Out (HIFO)
Maximum Control: Beyond FIFO and LIFO, many brokerages, including E*TRADE, offer Specific Lot Identification (SLI). This method allows you to personally choose which specific shares you want to sell at the time of the sale. This gives you the ultimate control to minimize gains or maximize losses for tax purposes.
HIFO: A common strategy used with SLI is Highest Cost First-Out (HIFO), where you select the shares with the highest cost basis to sell first, aiming to reduce your taxable gains.
Disclaimer: Choosing a cost basis method has significant tax implications. It is crucial to consult with a qualified tax advisor to determine the most suitable method for your individual financial situation before making any changes. E*TRADE, and this guide, do not provide tax advice.
Step 1: Engage and Understand Your Current Settings
"Are you looking to optimize your investment tax strategy? The first step is to truly understand how your E*TRADE account is currently handling your stock sales. Many investors aren't even aware of their default cost basis method until tax season hits. Let's find out what yours is and why it matters!"
Log in to your E*TRADE Account: Begin by logging into your E*TRADE account on their website. Familiarize yourself with the navigation.
Navigate to Account Settings/Preferences: Look for sections like "Account Settings," "Profile," "Preferences," or "Tax Information." The exact phrasing might vary slightly, but generally, you'll find cost basis settings under an account management or tax-related section.
Locate Cost Basis Method: Within these settings, search for "Cost Basis Method," "Lot Selection," or similar terminology. E*TRADE explicitly states that FIFO is their default. You'll likely see this indicated.
Review Your Holdings: Take a moment to review some of your current stock holdings, especially those purchased at different price points. Understanding your existing "lots" (groups of shares bought at the same time and price) will help you visualize the impact of different cost basis methods.
Step 2: Evaluate the "Why" – Is LIFO Right for You?
Changing your cost basis method isn't a decision to take lightly. It's driven by your individual tax situation and investment goals.
Consider Your Tax Bracket: If you anticipate being in a higher tax bracket in the current year, minimizing capital gains might be a priority. LIFO, by selling higher-cost shares first, could potentially help in this scenario.
Market Trends:
Rising Market: In an inflationary or rising market, LIFO generally results in a higher Cost of Goods Sold (COGS) for businesses, and similarly, for investors, it means selling shares with a higher purchase price. This can lead to lower taxable gains or even realized losses, which can be used to offset other gains or income.
Falling Market: In a falling market, FIFO might be more advantageous as it would sell the older, potentially higher-cost shares first, leading to higher realized losses that can be used for tax-loss harvesting.
Investment Horizon: Are you a short-term trader or a long-term investor? Short-term gains are taxed at ordinary income rates, while long-term gains (for assets held over a year) are taxed at lower capital gains rates. The method you choose can impact whether your gains are classified as short-term or long-term.
Tax-Loss Harvesting: LIFO can be a powerful tool for tax-loss harvesting, allowing you to strategically sell shares with a higher cost basis to generate losses that offset gains or a limited amount of ordinary income.
Consult a Tax Professional: This is the most critical step. Before making any changes, have a detailed discussion with a qualified tax advisor. They can analyze your specific financial situation, advise on the best cost basis method for your tax planning, and explain any potential implications, including wash sale rules. E*TRADE does not provide tax advice, and their support staff cannot offer recommendations on which method is best for you.
Step 3: Initiating the Change on E*TRADE
While ETRADE states that FIFO is their default and offers "Lot Selection" in account preferences, the ability to globally change your default from FIFO to LIFO for all future transactions might not be a self-service option directly within the online portal for all account types. Many brokers, if they allow LIFO as a default, require direct communication. ETRADE's documentation suggests Specific Lot Identification (SLI) as the primary method for controlling which shares are sold.
Option A: Changing Default Lot Selection (If Available)
Access Account Preferences: As mentioned in Step 1, navigate to your "Account Settings," "Preferences," or "Tax Information" within your E*TRADE account.
Look for "Lot Selection" or "Cost Basis Method": Within this section, carefully examine the available options. ETRADE's documentation mentions "Once you decide which method is best, you can select it in your account preferences under 'Lot Selection.'" However, this is primarily for how you want lots to be selected if you don't specify, rather than a direct, global switch to LIFO. It's more likely to be FIFO, HIFO (Highest Cost First-Out), LOFO (Lowest Cost First-Out), or MinTax (Minimum Tax Impact). While LIFO is a cost basis method, ETRADE might primarily facilitate it through specific lot identification rather than a blanket default setting.
Select Your Preferred Method: If LIFO is presented as a global default option (which is less common than specific lot selection for individual securities), choose it and save your changes. Be aware that this change typically applies to future trades only and is not retroactive.
QuickTip: Absorb ideas one at a time.
Option B: Utilizing Specific Lot Identification (Recommended for LIFO Strategy)
Since directly changing the default to LIFO across all future trades might not be readily available as a simple toggle, the most effective way to implement a LIFO-like strategy on E*TRADE is through Specific Lot Identification (SLI) at the time of sale. This gives you granular control.
When Placing a Sell Order: When you go to sell a security you hold, you will typically encounter an option to choose which specific shares (or "lots") you want to sell.
Locate "Cost Basis" or "Lot Selection" Option: Before confirming your sell order, look for a dropdown menu, checkbox, or link related to "Cost Basis," "Lot Selection," or "Tax Lot."
Choose Specific Shares:
You will usually see a list of your individual "lots" for that security, showing the purchase date, quantity, and cost basis for each.
To achieve a LIFO effect, you would manually select the most recently acquired shares (the "last in") to be sold first.
Alternatively, to achieve a HIFO (Highest Cost First-Out) effect (which often aligns with LIFO in a rising market), you would select the shares with the highest cost basis.
Confirm Your Selection: Ensure your desired lots are chosen before proceeding with the trade. This selection is crucial for accurate tax reporting.
Option C: Contacting E*TRADE Support Directly
If you are unable to find the option to set LIFO as a default or need further clarification, direct contact with E*TRADE's customer support is the next step.
Gather Account Information: Have your account number and any relevant security details ready.
Call E*TRADE Customer Service: The most effective way to discuss nuanced account settings is usually by phone. E*TRADE's general support number is often found on their "Contact Us" page (e.g., 800-387-2331).
Clearly State Your Intent: Explain that you wish to change your cost basis method from FIFO to LIFO, or understand how to consistently apply a LIFO-like strategy for tax purposes.
Inquire About Global Default: Ask if there's a way to set LIFO as your default cost basis method for all future sales rather than having to select it manually each time. Be prepared that this might not be an option, and specific lot identification will be the primary method.
Confirm Retroactivity: Crucially, ask if any change can be applied retroactively to past trades. The answer is almost universally no. Cost basis changes typically apply only to future transactions.
Step 4: Verifying and Monitoring
After making a change or establishing a new strategy, it's vital to verify and monitor its implementation.
Review Trade Confirmations: After selling shares, always review your trade confirmations and statements. These documents should clearly indicate the cost basis method used for that specific transaction.
Check Tax Documents: When E*TRADE issues your Form 1099-B at the end of the year, verify that your sales are being reported using the cost basis method you intended.
Maintain Records: Keep meticulous records of all your trades, including purchase dates, prices, quantities, and the cost basis method used for sales. This is invaluable for tax preparation.
Regularly Re-evaluate: Your financial situation and market conditions can change. Periodically re-evaluate whether your chosen cost basis method remains the most advantageous for your tax strategy.
Important Note: Even if you select LIFO or HIFO for a specific sale, ETRADE is required to track wash sales. A wash sale occurs if you sell a security at a loss and then buy back the same or a "substantially identical" security within 30 days before or after the sale. Losses from wash sales are disallowed for tax purposes.*
Conclusion
Changing your cost basis method from FIFO to LIFO on E*TRADE, or more accurately, implementing a LIFO-like strategy through specific lot identification, is a powerful move for tax-aware investors. It requires a clear understanding of the implications and a proactive approach. Remember, the goal is not just to change a setting, but to strategically manage your gains and losses to optimize your tax position. Always seek professional tax advice to ensure your strategy aligns with your overall financial goals.
10 Related FAQ Questions
Tip: Don’t just scroll to the end — the middle counts too.
How to choose the best cost basis method for my investments?
Quick Answer: There's no single "best" method; it depends on your individual tax situation, market conditions, and investment goals. Consult a qualified tax advisor who can analyze your specific circumstances, including your income, other investments, and future outlook.
How to know what my current cost basis method is on E*TRADE?
Quick Answer: Log into your E*TRADE account, navigate to "Account Settings" or "Preferences," and look for "Cost Basis Method" or "Lot Selection" settings. FIFO is generally the default.
How to select specific shares to sell on E*TRADE?
Quick Answer: When placing a sell order, look for an option like "Cost Basis," "Lot Selection," or "Tax Lot" before confirming the trade. This will allow you to manually choose which specific shares (lots) from your holdings you want to sell.
How to understand the tax implications of FIFO vs. LIFO?
Quick Answer: In a rising market, FIFO tends to result in higher capital gains (selling older, lower-cost shares), leading to higher taxes. LIFO (selling newer, higher-cost shares) can result in lower capital gains or higher losses, potentially reducing your tax liability.
How to apply a LIFO strategy for tax-loss harvesting?
QuickTip: Take a pause every few paragraphs.
Quick Answer: To use a LIFO strategy for tax-loss harvesting, you would identify and sell your most recently acquired shares (or those with the highest cost basis) that are currently trading at a loss, to offset capital gains or a limited amount of ordinary income.
How to ensure my cost basis method change applies to future trades?
Quick Answer: Most cost basis changes are not retroactive. Any change you make, especially for a global default if available, will typically only apply to trades executed after the change is implemented. For specific lot selection, the chosen method applies to that particular trade.
How to avoid wash sales when changing cost basis methods or tax-loss harvesting?
Quick Answer: Be mindful of the wash sale rule: if you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed for tax purposes. Always consult with a tax professional to navigate these rules.
How to track my cost basis across multiple E*TRADE accounts or brokers?
Quick Answer: While E*TRADE tracks cost basis for securities held within their platform, it's your responsibility to track it across multiple accounts or brokers. Keep meticulous records of all transactions, and consider using tax software or consulting a tax advisor who can consolidate this information.
How to confirm the cost basis reported on my E*TRADE 1099-B?
Quick Answer: At the end of the tax year, E*TRADE will issue a Form 1099-B. Carefully review this form and compare it to your own records and trade confirmations to ensure the reported cost basis and gains/losses are accurate according to your chosen methods.
How to get personalized tax advice for my E*TRADE investments?
Quick Answer: E*TRADE does not provide tax advice. To get personalized guidance, contact a Certified Public Accountant (CPA) or a qualified tax professional. They can help you understand the nuances of cost basis methods in relation to your overall financial plan.
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