Prior to selling a security, investors have to choose a default method of determining basis. There’s LIFO (last in, first out), HIFO (highest in, first out), LCFO (lowest cost, first out) and more … but if an investor doesn’t pick a method, then the broker-dealer must use the FIFO (first in, first out) method. FIFO uses the earliest acquired shares first.
Broker-dealers give customers cost basis information on the trade confirmation and on statements. Also, each year firms must provide customers and the IRS with cost basis information on Form 1099-B, and firms must indicate whether a capital gain is short-term (one year or less) or long-term (more than a year).
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