What is the FIFO Method? The First In, First Out Rule for US Stock Investors

When you buy and sell US stocks, there’s a hidden rule quietly working in the background, deciding which shares you’ve sold, how much profit you’ve actually made, and how your taxes are calculated. This rule isn’t about luck or market timing. It’s about something far more systematic, a method called FIFO.

It may sound like accounting jargon, but FIFO has a direct impact on your investment returns, especially if you’ve bought the same stock multiple times at different prices. The difference it makes can run into hundreds or even thousands of dollars when calculating your gains or losses.

Let’s break down with this blog what FIFO methodology really means, how it works in buying and selling US stocks, and why investors, especially global ones, should understand it before clicking that “sell” button.

What is FIFO Methodology?

FIFO stands for First-In, First-Out. It is a method used to track which shares are sold when you make a sale, especially when you’ve bought the same stock multiple times at different prices.

Under FIFO, the oldest shares (first bought) are assumed to be sold first. This is the standard method used in India (as per Income Tax rules) and globally.

Example: Let’s say you buy shares of Company XYZ multiple times:

• BUY - Jan 1 - 10 Shares - $100 per share
• BUY - Feb 1 - 10 Shares - $120 per share

And then SELL 15 shares on Mar 1 at $150 per share. As per FIFO:

• First, 10 shares from Jan 1 ($100 each) are sold
• Then, 5 shares from Feb 1 ($120 each)

Realized Gain:

• 10 × ($150 − $100) = $500
• 5 × ($150 − $120) = $150
• Total Realized Gain = $650

Note: When shares are sold, the invested value is not reduced by the sale proceeds. Instead, the invested value is adjusted based on the original cost of the shares sold, which is calculated using the FIFO (First-In, First-Out) method.

Why Does FIFO Matter for Investors?

Think of FIFO like a supermarket checkout line. The first items placed in the cart are the first to leave the store. Similarly, when you sell shares, the ones you bought earliest are considered sold first.

Now, this isn’t just a technicality, it affects how much tax you pay. Since older shares are typically bought at lower prices, selling them first often leads to higher capital gains. For investors, especially those dealing in US stocks through Indian platforms, understanding this helps manage both returns and taxes efficiently.

For instance, if you’ve been investing in Apple for two years, buying periodically during dips, when you sell a portion now, the profit calculated will depend on the cost of your earliest Apple shares, not the ones you bought recently at a higher price.

FIFO and Capital Gains: The Tax Angle

In most countries, including India and the US, your capital gains (the profit you make when selling an asset) are calculated based on this FIFO rule.

• If you’ve held your oldest shares for more than 24 months (for unlisted foreign securities), the gain is treated as long-term and taxed at a lower rate.
• If held for less than 24 months, it’s short-term and taxed as per your income tax slab.

That’s why knowing which shares are being “sold” first is crucial, it directly determines whether your gain is taxed as short-term or long-term.

A common mistake new investors make is assuming that they can “choose” which shares to sell. But unless you use specific identification (which isn’t always supported by brokers in India), FIFO automatically applies.

FIFO in the US Market Context

In the US, investors do have more flexibility. They can choose from methods like FIFO, LIFO (Last-In, First-Out), or Specific Identification when reporting to the IRS. However, FIFO remains the default and most widely accepted method.

When Indian investors buy US shares through regulated platforms, their transactions are automatically tracked using FIFO. This ensures consistency with Indian tax laws and simplifies record keeping for filing returns.

FIFO vs. Other Methods: Why FIFO Is Preferred

While other accounting methods exist, FIFO is considered the most transparent and fair for investors. Here’s why:

For Indian investors, FIFO remains the mandatory and simplest method since it removes ambiguity and keeps compliance straightforward.

Real-World Example: How FIFO Changes Returns

Imagine you bought 20 shares of Microsoft; 10 at $250 and 10 more at $400. Now, you sell 10 shares when the price hits $450.

As per FIFO, the first 10 (bought at $250) are sold, resulting in a $200 gain per share. If LIFO were allowed, you’d be selling the $400 shares first, realizing only $50 per share profit.

That’s a big difference in taxable gains, and that’s why FIFO matters.

Final Word on FIFO

Understanding FIFO might not sound exciting at first, but it’s one of those behind-the-scenes rules that can quietly shape your investment outcomes. Whether you’re buying shares of Nvidia or selling your long-held Tesla stock, knowing which “batch” of shares you’re actually selling can make a big difference when it’s time to file taxes.

In investing, every small detail counts and FIFO is one detail worth remembering.

Disclaimer:

The content is meant for education and general information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. The securities quoted are exemplary and are not a recommendation. This in no way is to be construed as financial advice or a recommendation to invest in any specific stock or financial instrument.The figures mentioned in this article are indicative and for general informational purposes only. Readers are encouraged to verify the exact numbers and financial data from official sources such as company filings, earnings reports, and financial news platforms. The Company strongly encourages its users/viewers to conduct their own research, and consult with a registered financial advisor before making any investment decisions. All disputes in relation to the content would not have access to an exchange investor redressal forum or arbitration mechanism. Registered office address: Office No. 507, 5th Floor, Pragya II, Block 15-C1, Zone-1, Road No. 11, Processing Area, GIFT SEZ, GIFT City, Gandhinagar – 382355.