Coruscation

The method you choose can have a pretty drastic impact on your tax bill, at least in some cases. Let's say you bought $1,000 of Bank of America stock, or about 62 shares, back in August 1980 (the company was then known as Nations Bank). And assume you reinvested all dividends back into the same stock. Now, 13 years later, your stock holdings are worth about $19,000. If you sold $10,000 of the stock earlier this week, or about 830 shares, you would have the option of generating a giant gain, or a big loss, all depending on what method you use. For instance, if you sold the oldest shares first, you would log a capital gain of more than $7,100. But if you sold the newest shares first, you could post a loss of more than $14,000, according to calculations by NetBasis, the unit of NetWorth Services that provides cost basis calculations for investors.

If you don't pick a specific method, most brokerage firms will revert to their default, whereby they sell your oldest shares first, known as first in first out, or FIFO. (This applies to stocks and exchange-traded funds. For mutual funds, the default method is a bit different; they use the average cost of the shares held.)

"When people buy stock over time, FIFO may not be the best option," said Thomas B. Cooke, a tax and business law professor at Georgetown University's McDonough School of Business. "That makes it very incumbent on investors when they get their confirmation statement to make sure the right stock was sold."

You can choose from several different methods: You can sell the newest lots first, for instance, or you can unload the highest- or lowest-cost shares first. Or, your brokerage firm may have a tool to help you decide. At Schwab, for instance, a tax lot optimizer will choose the lots that let you take losses first. (Of course, if you are selling all of your stock, choosing a method is a moot point.)