How can the HIFO sell method reduce capital gains?

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Answer

Following is an example of how HIFO (high in, first out) can reduce capital gains:

*An investor purchased 100 shares of XYZ Company having a cost basis of $4,000, three months later an additional 100 shares are purchased for a cost basis of $6,000 and four months later an additional 100 shares are purchased for a cost basis of $5,000.

*Enough time has past such that the investor’s 300 shares would be considered a long-term holding if sold. The investor now sells 100 shares at a cost of $70/per share.

*If the investor selected the FIFO (first in, first out) cost method the investor would select to sell the 100 shares with a cost basis of $4,000 and realize a reportable capital gain of $3,000 ($7,000 - $4,000).

*The investor wants to reduce the capital gains.

*Using HIFO, the investor would select to sell the 100 shares with a cost basis of $6,000 and realize a reportable capital gain of only $1,000 ($7,000 - $6,000).