Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?

Last-in, first-out (LIFO)
First-in, first-out (FIFO)
Average cost basis
Specific identification

The correct answer is: First-in, first-out (FIFO)

The IRS automatically uses the First-in, First-out (FIFO) method when a client does not specify which shares have been sold. This means that the shares that were purchased first are considered to be the ones sold first. This method is particularly relevant in situations where a taxpayer has made multiple purchases of the same security at different times and prices. By using FIFO, the oldest shares will often have a lower cost basis compared to more recently purchased shares, which can have implications for capital gains calculations. Understanding this approach is crucial for investors as it can significantly affect their tax liabilities, especially in fluctuating markets where security prices change. In contrast, methods like Last-in, First-out (LIFO), Average cost basis, and Specific identification require explicit instructions from the client at the time of sale, and they are not automatically used by the IRS without that direction.