Question
Does the IRS recognize the HIFO sell method?
Answer
The Internal Revenue Service does not recognize HIFO (high in, first out) as an accounting method but it generally permits an investor to specifically identify his or her shares at the time stock is sold, for reporting capital gains and losses. Taking advantage of specific identification of shares sold effectively permits an investor to use HIFO by permitting the investor to select the right lot of stock to sell. However, in order to take advantage of specific identification, IRS rules generally require that an investor adequately identify the specific lots of stock that are sold either by delivering the proper lot for sale (in the case of stock held in physical form) or by maintaining adequate records of his or her stock lot purchases and instructing the broker or custodian of the specified lot(s) to be sold at the time of sale and, within a reasonable time after the sale, receiving from the broker or agent written confirmation that the proper lot was sold (in the case of stock held in street name or by a nominee). To simplify things for investors and brokers, the IRS has concluded that a written standing order from a customer to a broker to apply the HIFO method to sales of the investor’s shares where written confirmations were provided to the customer that per instructions, highest cost shares were sold first, satisfied the adequate identification requirement.
It is important to note the steps that an investor (and the investor’s broker or agent) must timely take in order to satisfy the adequate identification requirement. According to the IRS rules, if an investor does not adequately identify the specific shares to sell at the time of sale, all gain and loss calculations generally default to the FIFO (first in, first out) method. That is, the investor is treated for tax purposes as selling the oldest purchased first.