Smarter Tax Selling: How the LIFO Method Can Reduce Your Capital Gains

When you sell shares, which ones did you actually sell? The Australian Taxation Office (ATO) gives you a choice. The 'Last-In, First-Out' (LIFO) method is a powerful strategy, especially in a rising market, that can help you manage your capital gains tax bill.

What is LIFO and Why Use It?

The LIFO method assumes you are selling the shares you purchased most recently. In a market where prices are generally trending upwards, your most recent purchases will likely have the highest cost base.

By selling these "last-in" shares first, the difference between your sale price and cost base is smaller, resulting in a lower capital gain. This makes LIFO a popular choice for investors looking to minimise their tax liability in a specific financial year.

LIFO 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 LIFO, you match the sale against your most recent purchase:

Sale Value: $120
Cost Base (from July): $100
Capital Gain/(Loss): $120 - $100 = $20 (a capital gain)

This $20 capital gain would then be subject to capital gains tax.

Complex LIFO Scenario

Let's say your purchase history for Company ABC is:

Parcel 1: Buy 8 shares @ $10 each (Cost: $80)
Parcel 2: Buy 6 shares @ $12 each (Cost: $72)
Parcel 3: Buy 10 shares @ $11 each (Cost: $110)

Now, you want to sell 12 shares at $13 each.

With LIFO, you start from the last parcel purchased (Parcel 3):

Sell 10 shares from Parcel 3:
Gain = (10 × $13) - (10 × $11) = $130 - $110 = $20 gain.
Sell the remaining 2 shares from Parcel 2:
Gain = (2 × $13) - (2 × $12) = $26 - $24 = $2 gain.

Total Capital Gain = $20 (Parcel 3) + $2 (Parcel 2) = $22

The taxtallee Advantage

Manually tracking different parcels and choosing the optimal strategy for every sale is tedious and prone to error. taxtallee automates this process, allowing you to select your preferred accounting method (like LIFO) and instantly see the tax implications, empowering you to make smarter selling decisions.