Tax-Efficient Lot Selection in Mixed Accounts

Why lot selection matters in mixed accounts

When you hold the same security across multiple account types (taxable brokerage accounts, IRAs, 401(k)s), the order and the lots you sell can change your tax bill dramatically. Selling a high-basis lot or a long‑held lot in a taxable account often produces little or no capital gains tax, while selling a low-basis, short‑term lot can generate a large tax hit at ordinary income rates. In contrast, trades inside IRAs and 401(k)s do not generate immediate capital gains tax, which gives you flexibility when rebalancing.

Being deliberate about lot selection can reduce taxes now, preserve tax‑efficient positioning, and create more cash for goals such as home purchases or debt payoff. Brokers often default to a method (usually FIFO), so you must actively choose a different method—usually specific identification—to get the tax outcome you want.

(For a practical tax-loss harvesting framework you can apply alongside lot selection, see FinHelp’s overview on Tax-Loss Harvesting.)

Basic rules and the tax mechanics (IRS references)

• Capital gains tax rates: Long‑term capital gains (assets held > 1 year) are taxed at preferential rates (0%, 15%, or 20%) depending on taxable income; short‑term gains (≤ 1 year) are taxed as ordinary income. (See IRS Publication 550 and Topic No. 409.)
• Net Investment Income Tax (NIIT): An additional 3.8% may apply to net investment income above MAGI thresholds (e.g., $200k single, $250k married filing jointly). Check IRS guidance for current thresholds. (See IRS Section 1411 information on IRS.gov.)
• Cost‑basis reporting: Brokers must report cost basis for most covered securities to the IRS; however, reporting rules vary by security type and purchase date. Maintain your own records and confirm what your broker reports. (See IRS cost basis rules in Publication 550 and the IRS cost basis FAQs.)

Source authority: IRS.gov (Publication 550, Topic No. 409) and broker statements; use these as your baseline when planning trades.

Practical lot‑selection strategies for mixed accounts

1. Prioritize losses and high‑basis lots in taxable accounts

• Sell lots with unrealized losses first if you want to offset gains (mind the wash sale rule). If you need cash and have both low‑basis and high‑basis lots, prefer selling high‑basis lots to minimize gains.

1. Use long‑term lots over short‑term

• Given the favorable long‑term rates, satisfy cash needs by selling lots held longer than one year when possible. Short‑term gains are taxed at ordinary rates and should be avoided if tax efficiency is a priority.

1. Harvest gains selectively in low‑income years

• If you expect a year with lower taxable income (e.g., early retirement, sabbatical), realize long‑term gains up to the 0% or 15% thresholds. This is a form of opportunistic gain harvesting and can be paired with lot selection to access low-tax or tax-free gains (see FinHelp’s article on Harvesting Gains in Low‑Income Years).

1. Coordinate across account types

• Rebalance and trade inside tax‑deferred accounts (IRAs, 401(k)s) for assets that would generate large taxable events in a brokerage account. For example, sell a low‑basis lot in an IRA (no tax impact) to rebalance and replace it by buying an equivalent in the taxable account that you can later sell with a favorable basis.

1. Avoid wash sales when harvesting losses

• If you sell a lot at a loss in a taxable account to realize that loss, avoid buying substantially identical securities within 30 days in taxable or traditional IRAs—because the loss may be disallowed. Be especially careful when you hold similar assets across multiple accounts.

1. Use Specific Identification for precision

• Specific ID lets you tell your broker exactly which lot to sell. This is the most straightforward way to control the tax outcome. Make the election at the time of sale (usually via your broker’s trading ticket or trade confirmation) and keep documentation.

Step‑by‑step: executing a tax‑efficient lot sale

1. Inventory your lots: List purchase dates, quantities, and cost basis for every lot in your taxable account. Confirm what your broker reports to the IRS.
2. Decide your tax objective: Minimize gains today? Harvest losses to offset gains? Generate cash while preserving after‑tax wealth? Your objective dictates which lots to use.
3. Check holding periods: Flag lots that qualify for long‑term treatment (> 1 year) and short‑term lots (≤ 1 year).
4. Run a tax simulation: Estimate after‑tax proceeds using current federal capital gains brackets and the potential NIIT; include state tax if relevant.
5. Place the trade using Specific Identification: Instruct your broker which lot(s) to sell. Get written confirmation showing the specific lot(s) sold and retain for tax records.
6. Rebalance and document: After the sale, rebalance across accounts as needed, and file your documentation with your tax records.

Example: simple math

You hold 200 shares of XYZ purchased in two lots:

• Lot A: 100 shares at $20 (acquired 3 years ago — long‑term), cost basis $2,000
• Lot B: 100 shares at $60 (acquired 6 months ago — short‑term), cost basis $6,000

Current price = $80. You need to sell 50 shares.

• If you sell 50 shares from Lot B (short‑term): gain = (80 − 60) × 50 = $1,000 taxed at ordinary income rates (e.g., 24% = $240 tax).
• If you sell 50 shares from Lot A (long‑term): gain = (80 − 20) × 50 = $3,000 taxed at long‑term capital gains rates (e.g., 15% = $450 tax).

Superficially it looks like selling Lot B incurs less tax in absolute dollars because basis differs. The right choice depends on: your marginal ordinary income tax rate, whether your long‑term gains might be taxed at 0%/15%/20%, NIIT exposure, and your multi‑year tax plan. This is why simulations matter.

Important compliance and operational details

• Broker defaults: Many brokers default to FIFO unless you make a specific election. Make specific identification at the time of sale and keep confirmations. Check your broker’s lot‑selection procedures.
• Recordkeeping: Brokers report to the IRS, but you are ultimately responsible for basis reporting. Retain trade confirmations and cost‑basis worksheets.
• Wash sale rule: A loss can be disallowed if you (or your spouse/IRA) buy substantially identical stock within 30 days before or after the sale. This rule applies across accounts—selling in a taxable account and buying in an IRA can trigger a disallowance. (See IRS rules on wash sales in Publication 550.)
• Mutual funds and ETFs: Covered security rules for cost basis reporting differ by type and acquisition date. Confirm with your broker which lots are covered.

Common mistakes and how to avoid them

• Assuming FIFO is best: Brokers’ default methods often don’t match tax‑efficient choices—always review and change the election where appropriate.
• Failing to document Specific ID: Without clear documentation at trade time, your broker may apply a default method that generates higher taxes.
• Ignoring state taxes and NIIT: Capital gains projections that ignore state income tax and NIIT can understate your true tax cost.
• Causing wash sales across accounts: Buying the same ETF in an IRA immediately after selling it at a loss in a taxable account can eliminate the loss.

When to get professional help

If your portfolio contains complex positions (options, corporate actions, or positions spread across many accounts), or if you’re near NIIT thresholds or planning Roth conversions, professional advice is warranted. In my practice advising high‑net‑worth clients, coordinated lot selection and multi‑year tax planning reduced realized capital gains by thousands or more per year—outcomes that compound over time.

For operational questions, contact your broker to learn their specific ID procedures and confirm how they submit cost‑basis information to the IRS.

Links and further reading

• FinHelp — Tax‑Loss Harvesting: https://finhelp.io/glossary/tax-loss-harvesting/
• FinHelp — Capital Gains Harvesting vs. Tax‑Loss Harvesting: https://finhelp.io/glossary/capital-gains-harvesting-vs-tax-loss-harvesting/
• IRS Publication 550, Investment Income and Expenses: https://www.irs.gov/publications/p550
• IRS Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409

Final note and disclaimer

This article explains common principles and processes for tax‑efficient lot selection in mixed accounts and cites IRS materials for reference. It is educational only and not individualized tax or investment advice. Rules may change and state tax treatment varies—consult a CPA or fiduciary financial advisor who can model your specific situation before implementing trades.