Specific Identification
A cost basis accounting method that allows investors to choose exactly which tax lots are being sold when disposing of a partial position, enabling precise control over the realized gain, loss, and holding period of each transaction.
Specific identification is the most flexible cost basis method available to investors under IRS rules, and it is the preferred approach for tax-savvy individuals managing taxable accounts. Rather than applying a formula like FIFO or average cost, specific identification lets you designate — before the sale is executed — exactly which purchase lots (specific shares from specific purchase dates at specific prices) you are disposing of.
The practical power of specific identification lies in the ability to choose the outcome most favorable for your tax situation. If you want to minimize current-year taxes, you can select the highest-basis lots to reduce the size of the realized gain. If you want to harvest a loss, you can select lots purchased at a price higher than today's market value. If you need to control whether a gain is short-term or long-term, you can select lots held for the appropriate period.
To elect specific identification, you must notify your broker before (or at the time of) the sale which specific lots you intend to sell, and you must receive a written confirmation (which can be an electronic acknowledgment) identifying those lots. You cannot retroactively apply specific identification after a sale has been executed under FIFO or another default method. This advance-election requirement is a common pitfall — investors who forget to designate lots before clicking 'sell' forfeit the opportunity for that particular transaction.
For mutual funds, specific identification is available but some fund companies require you to specify lots in writing or through their website prior to redemption. Average cost (also called average basis) is a simpler alternative that many mutual fund investors use, but once you use average cost for a fund, switching to specific identification for that fund requires specific IRS procedures.
Brokers that offer specific identification typically provide a 'lot selection' interface in their online trading platforms where you can choose which lots to sell at the time you place the order. Robust portfolio management software and tax-optimization platforms can automate lot selection to minimize taxes across the entire portfolio on every transaction, a practice increasingly used by high-net-worth investors and robo-advisors.