Cost Basis

• When you buy a stock or other type of security, the Internal Revenue Service regards the price you paid for it as your cost basis. If you sell the stock or security at a later date for the same price or a lesser price, you do not profit from its sale and therefore owe no taxes on the sale proceeds. If the security increases in value, you experience a capital gain, and when you sell it you must pay taxes on the difference between the cost basis and the sale price.
  
  

Price Fluctuation

• Stock prices and the values of other commodities fluctuate on a daily basis. therefore if you buy the same stock once a month for several years, every stock you buy would have a different cost basis. Generally, inflationary trends mean that prices tend to rise over time, so in theory you would probably pay less for the stock you bought first and you would pay the most to buy the stock you bought last. In this case, if you sold just a portion of the stock and used the LIFO taxation method, you would pay less taxes than if you used the first-in-first-out method which assumes you sell the longest held stock first. However, if your stock loses value over time you would pay less taxes by use LIFO.
  
  

Pricing Security Sales

• When you sell stock, you can either used the specific identification method, which involves identifying the particular stocks you want to sell, or you can use the LIFO method. The IRS does not use the LIFO method as the default pricing method for stock sales, but you can effectively use the LIFO method if you use the specific identification method to identity the last stocks you bought as the ones you sold. However, the IRS does use the LIFO method for all withdrawals from variable annuities.
  
  

Variable Annuities

• Variable annuities are insurance contracts that hold mutual funds containing stocks and bonds. You can buy a variable annuity with pre-tax or after-tax earnings. If you buy a variable annuity with pre-tax earnings, you do not have to use a particular cost valuation model since all your withdrawals are fully taxable. However, if you buy a variable annuity with after-tax earnings, it means by using LIFO, you must withdraw your earnings, which are fully taxable before you withdraw your contributions, which are not taxable.