Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Under which method does the IRS assume the order of share sales if not specified?

1. Last-in, first-out (LIFO)

2. Average cost

3. Specific identification

4. First-in, first-out (FIFO)

The correct answer is: First-in, first-out (FIFO)

The IRS assumes the order of share sales under the First-in, first-out (FIFO) method if no specific method is indicated by the taxpayer. This means that when shares are sold, it is presumed that the shares that were purchased earliest are the ones sold first. This can have tax implications, as the cost basis of older shares may be lower, potentially leading to a larger capital gain if the shares have appreciated in value over time. In specific situations, investors might choose different methods such as Last-in, first-out (LIFO), Average cost, or Specific identification to manage their tax liability more effectively. Each of these methods has its advantages and can be employed if the investor specifies them. However, in the absence of such specification, FIFO is the default method the IRS uses, making it fundamental for investors to understand how it may affect their tax calculations and reporting when selling shares.