FIFO Explained: The Simple, Default Method for Calculating Your Capital Gains

The 'First-In, First-Out' (FIFO) method is the most common and straightforward way to calculate capital gains on your investments. It's often the default method used by accountants and the ATO's myTax portal, but is it always the best choice for your tax situation?

What is FIFO?

The FIFO method assumes you are selling the shares you purchased first. It's a simple, chronological approach: the first shares you buy are the first ones you sell. In a market that has risen over time, this often means you are selling your oldest shares, which typically have the lowest cost base, potentially resulting in a larger capital gain.

FIFO is often beneficial for accessing the 50% CGT discount, as you are more likely to be selling shares you have held for over 12 months.

FIFO in Action

Imagine you made the following purchases:

Feburary: Buy 10 shares at $5 each (Cost: $50)
July: Buy 10 shares at $10 each (Cost: $100)

You then decide to sell 10 shares at $12 each (Sale Value: $120).

Using FIFO, you match the sale against your first purchase:

Sale Value: $120
Cost Base (from January): $50
Capital Gain/(Loss): $120 - $50 = $70 (a capital gain)

This $70 capital gain would then be subject to capital gains tax.

FIFO vs. LIFO: Which is Right for You?

Neither method is universally "better"—the optimal choice depends on your financial goals for the year. FIFO is simple and good for long-term gains, while LIFO can be a strategic tool for minimizing tax in the short term.

The best part is, you don't have to stick to one. taxtallee allows you to model the outcome of any sale using different methods, giving you the data to make an informed decision before you trade.