FIFO stands for First In, First Out and is a common accounting method used to manage inventory, trades, or investments. In trading, FIFO is a rule or practice that dictates how positions are closed, particularly for tax or reporting purposes.
How FIFO Works in Trading: #
- Acquisition Example:
- Buy 100 shares at $50 (Batch 1).
- Buy 100 shares at $60 (Batch 2).
- Selling Example:
- If you sell 50 shares, FIFO assumes you’re selling from Batch 1 at $50/share.
- This determines the cost basis for calculating profits or losses.
Why FIFO Matters? #
- Tax Implications: It impacts the capital gains or losses you report.
- If the first-acquired shares were at a lower cost basis, selling them first may result in a higher taxable gain.
- Portfolio Management: It helps streamline position management by using a predictable method to calculate which trades to close.
Need more help? #
If you have any questions, encounter issues, or have suggestions, please don’t hesitate to let me know.
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