At 68, She Plans to Sell $100,000 From a Fund She’s Been Buying for 20 Years. The Shares She Chooses Could Change Her Tax Bill by Thousands

She clicked sell on $100,000 of her index fund without realizing that one setting buried in her brokerage account could quietly steer thousands of dollars away from the IRS, and she had no idea the window to change it was closing fast.

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She logs into her brokerage account, enters $100,000 in the sell box for the index fund she has bought every month for 20 years, and hits submit. The trade is completed in seconds, but the screen never asks the question that determines her tax bill: which shares?

She is 68, single, retired, and the fund is held in a taxable brokerage account, so the sale will appear on this year’s return. Many investors are in a similar position. Households headed by people ages 55 to 69 own about 39% of all stock and mutual fund shares held outside workplace retirement plans, according to Federal Reserve data. A lot of those positions were built one automatic purchase at a time.

Each Monthly Purchase Became a Separate Tax Lot

Every monthly buy created its own batch of shares with its own purchase price and date. Tax rules call each batch a tax lot. What she paid for a lot is its basis. Her gain is the sale price minus the basis of the lots that are sold. Because her earliest shares cost much less than the newer ones, the lots that leave the account determine how large the gain will be.

Brokerages generally rely on one of three methods:

• First in, first out (FIFO): the oldest shares are sold first. This is also the IRS default for stock when the seller does not identify shares (26 CFR 1.1012-1(c)(1)).
• Average cost: each share is assigned the same blended price. Many brokerages and fund companies use this as the default for mutual funds.
• Specific identification: the seller chooses the lots. Highest-cost-first is an automatic version that sells the most expensive lots first.

The Same $100,000 Sale Can Create Three Very Different Tax Bills

Here is a simplified version of her history. Her purchases are grouped into four five-year lots: 1,200 shares at $30, 1,000 at $45, 800 at $65, and 1,000 at $95. The fund trades at $110, so she sells about 909 shares. Her most recent purchase was more than a year ago, so every lot qualifies as long-term. Before the sale, her taxable income is about $60,000, and her modified adjusted gross income, the figure Medicare uses, is about $80,000.

In 2026, a single filer pays 15% on long-term gains once taxable income rises above $49,450, up to $545,500. Her entire gain is taxed at 15%.

Same sale, same fund. Choosing the more expensive lots instead of letting FIFO apply saves her roughly $8,900 in federal tax. Compared with average cost, she saves about $5,200.

She Has to Lock in the Lot Choice Before Settlement

She can choose lots if she tells her broker which shares to sell at the time of the trade and gets written confirmation. Treasury rules accept the selection if it is made by settlement date, and a standing instruction already on file also counts (26 CFR 1.1012-1(c)(8)). Once the trade settles, the opportunity is gone.

Mutual funds have one more complication. She can use a cost method such as specific identification only if she has not already used average basis on an earlier sale of that fund. Her first sale establishes the pattern. On the Bogleheads forum, one investor described trying to switch a fund’s method just to see what would change. That kind of checking needs to happen before the first sale.

Selling the Higher-Cost Shares Now Can Still Help Later

Selling the costlier shares first leaves the cheaper ones in place, which pushes the gain farther into the future. That still works in her favor. Future sales may happen in a lower-income year. Shares she still owns at death receive a new basis equal to their fair market value on the date of death, so her heirs could sell those $30 shares with little or no taxable gain.

If she keeps buying, the newest lots need attention. Shares held for one year or less create short-term gains, taxed as ordinary income. In her case, that means the 22% bracket. A highest-cost setting could choose a recent lot.

A Smaller Gain Could Also Reduce Her Medicare Premiums Later

Medicare sets premiums using income from two years earlier. Single filers above $109,000 pay a surcharge. Under FIFO, her income rises to about $152,700, which at 2026 rates means a monthly Part B premium of $405.80 plus a $37.50 Part D add-on. That is about $2,900 extra per year, while average cost creates only about $1,150 in extra premiums. Highest-cost-first keeps her near $93,600, below the threshold. The limits will change by then, but the gap remains.

Social Security works in a similar way. Up to 85% of benefits can become taxable once a single filer’s provisional income exceeds $34,000, and since she is already above that level, this sale does not alter the result for her. For a retiree with lower income, a larger gain could push more benefits into taxable income.

One Brokerage Setting to Change Before the Next Sale

Before she sells another share, she should open the cost-basis settings for this fund and change the default to specific identification, with highest cost first, or the broker’s tax-efficient lot option, as the standing instruction. Then she should review the trade confirmation to make sure it lists the shares sold.

The expensive mistake is assuming the brokerage will automatically choose the most tax-friendly shares. If she clicks sell without changing anything, she gets the default: average cost or FIFO. Under these assumptions, either choice can cost thousands more. It is one of several IRS rules that can quietly drain retirement accounts, and the rest are covered in a free resource: The Retiree’s Tax Trap Map.