Question
How can the HIFO sell method generate capital losses?
Answer
Following is an example of how HIFO (high in, first out) can generate capital losses:
An investor purchased 100 shares of XYZ Company having a cost basis of $3,000, three months later an additional 100 shares are purchased for a cost basis of $5,000 and four months later an additional 100 shares are purchased for a cost basis of $4,000.
Enough time has past such that the investor’s 300 shares would be considered a long-term holding if sold. The investor now sells 100 shares at a cost of $30/per share.
If the investor selected the FIFO (first in, first out) cost method the investor would select to sell the 100 shares with a cost basis of $3,000 and would not realize a loss ($3,000 - $3,000).
The investor wants to generate a capital loss.
Using HIFO, the investor would select to sell the 100 shares with a cost basis of $5,000 and realize a reportable capital loss of $2,000 ($3,000 - $5,000).