If you’ve sold investments at Fidelity or Schwab, you may have noticed a reference to a cost basis method, or you may not have noticed it at all.
Either way, a decision is being made. And that decision affects how much of your sale is treated as taxable gain or loss.
This article explains how cost basis methods typically work at Fidelity and Schwab, where the decision shows up during a sale, and what to watch for so defaults don’t quietly decide your tax outcome.
Why cost basis matters
Your cost basis is basically what you paid for an investment.
When you sell, the IRS calculates: sale price - cost basis = capital gain or loss
This applies to taxable brokerage accounts; cost basis methods do not apply to sales inside tax-advantaged accounts like IRAs. It also only matters if you are not selling all of your shares of a particular holding.
If you bought shares at different times and prices (which most people do), the cost basis method determines which shares are considered sold, and that affects taxation.
When you sell, you are always making a cost basis method choice whether you realize it or not. What you need to watch for is when and how the decision is made in the process and what your choices are at different brokerages.
At Vanguard, you’re forced to stop and choose a method before selling (See How to Choose a Cost Basis Method When Selling Investments at Vanguard). At Fidelity and Schwab, the decision is not as noticeable and easier to miss.
This is important because many people don’t realize they’ve made a tax decision until after the fact.
How Fidelity handles cost basis methods
Fidelity offers a broad menu of choices, many more than are available on other platforms and more than many investors expect. On Fidelity’s platform, the default method can be changed in account settings (see the resources link at the bottom of this article).
Core methods
- First In, First Out (FIFO) - Oldest shares are sold first, regardless of cost
- Last In, First Out (LIFO) - Most recently purchased shares are sold first
- Specific Share Identification (SpecID) - You choose exactly which lots are sold
Cost-based methods
- High Cost - Shares with the highest purchase price are sold first
- Low Cost - Shares with the lowest purchase price are sold first
Holding-period–aware methods
- High-Cost Long-Term - Long-term shares with the highest cost are sold first
- High-Cost Short-Term - Short-term shares with the highest cost are sold first
- Low-Cost Long-Term - Long-term shares with the lowest cost are sold first
- Low-Cost Short-Term - Short-term shares with the lowest cost are sold first
Tax-sensitive (algorithm-driven) methods
- Tax-Sensitive - Uses assumed tax rates to minimize estimated tax impact
- Tax-Sensitive Short-Term - Prioritizes losses and gains based on short-term tax treatment
Special case
- Intraday FIFO - Shares purchased the same day are sold first, then FIFO applies
Fidelity’s available disposal methods vary by security type, account, and transaction, but the methods listed above represent the full range commonly available on the platform.
How Schwab handles cost basis methods
Schwab offers seven cost basis choices and allows investors to set account-level default methods, with separate defaults by asset class for each account (see the resources link at the bottom of this article).
Core methods
- First In, First Out (FIFO) - Oldest shares are sold first, regardless of cost
- Last In, First Out (LIFO) - Most recently purchased shares are sold first
- Specific Share Identification (SpecID) - You choose exactly which lots are sold
Cost-based methods
- High Cost - Shares with the highest purchase price are sold first
- Low Cost - Shares with the lowest purchase price are sold first
Tax-aware option
- Tax Lot Optimizer - Schwab’s automated tool that selects lots intended to reduce the estimated tax impact of the trade
Special case
- Average Cost (primarily for mutual funds) - All shares are averaged together and treated as if they have the same cost basis
What Fidelity and Schwab have in common
Despite interface differences, both platforms share key realities:
- Defaults apply if you don’t change the cost basis method before completing the trade
- FIFO (First In, First Out) is typically the default method
- Mutual funds may default to Average Cost
- The IRS rules are the same
- Once a sale is completed, the cost basis used cannot be changed
- Defaults matter more than most people realize
- Automated tools don’t know your full financial picture
- Some methods optimize a single transaction, not your broader plan
- Tax-sensitive options rely on assumed tax rates, not your actual situation
The biggest risk isn’t choosing the “wrong” method, it’s not realizing a choice was made at all.
Before you place a trade at Fidelity or Schwab
Use this mental checklist:
Am I selling all shares of this investment, or just a portion? If you’re selling only part of a holding, the cost basis method determines which shares are sold. If you are selling all, the choice won’t change the total gain or loss.
Do I know which cost basis method is currently set as my default?
Do I want simplicity, or do I want control? Some methods are more hands-off, while others require specific selection but give you more flexibility.
Am I okay letting the platform decide for me on this trade? Defaults can be fine as long as you realize they’re being applied.
Do I understand whether the shares being sold are short-term or long-term? Short-term gains (held under a year) are generally taxed at higher rates than long-term gains (held over a year), which is why holding period matters when making the selection.
Would selling different shares change my tax outcome this year? Consider purchase timing, cost, and whether gains would be short-term or long-term.
Am I trying to minimize taxes or intentionally realize more taxes for a specific reason?
Do I understand that some common methods may result in higher taxable gains in rising markets? For example, FIFO often sells the oldest (and lowest-cost) shares first, which can increase reported gains, though outcomes vary.
You may not have a need to optimize every sale, but you do want to avoid accidental decisions.
The Takeaway
Cost basis methods are a tax strategy, and the decision exists everywhere.
Understanding where and when that choice appears is one of the simplest ways to avoid surprises and make more intentional financial decisions.
Resources
- Fidelity: How to Change Your Cost Basis Information
- Schwab: Save on Taxes: Know Your Cost Basis
- Schwab: How to Select a Cost Basis Method
- Schwab: Cost Basis Methods (a client-portal page that requires a Schwab login)