LIFO (Last In, First Out)

LIFO stands for Last In, First Out. Under this method, when you sell shares, the most recently purchased lots are considered sold first. This can be advantageous in specific tax situations, particularly when recent purchases were made at higher prices.

In a rising market, LIFO can reduce your taxable gains because your most recent purchases have the highest cost basis. Selling these higher-cost shares first means a smaller difference between sale price and cost basis, resulting in less tax owed. However, the gains are more likely to be short-term (taxed at ordinary income rates) since you're selling recently purchased shares.

LIFO is less commonly used than FIFO for securities because most brokerages default to FIFO, and switching requires explicit instructions. For crypto, LIFO is an option but requires careful record-keeping since exchanges don't typically track lots this way.

The main risk with LIFO is that it can create short-term capital gains taxed at higher rates. The strategy works best when your recent purchase prices are significantly higher than the sale price, generating losses or minimal gains regardless of holding period.

In declining markets, LIFO can be especially useful for tax-loss harvesting, since your most recent purchases (at higher prices) generate larger losses when sold at current lower prices.