In around two minutes you will know what is LIFO. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.

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LIFO, or Last in First out, is the asset management and valuation technique in which assets acquired, produced, or purchased last are used, disposed of, or sold first.

LIFO is one of the methods of calculating the cost basis of investments. With another one being FIFO, or First in First out.

And if you are not sure what cost basis or FIFO means, feel free to watch my previous videos.

LIFO method can be used for asset management, inventory valuation, investments cost basis calculation or for any similar goals. But the idea remains the same. Which is when assets or investments are sold, the assets or investments that were acquired the latest are disposed of.

Let’s say, you bought 20 shares of Company A in January for the price of $100 per share, and then 30 more shares in May for the price of $120 per share.

Then in July, when the price has reached $125, you decided to sell 40 shares. So, your total profit is $5000. In order to calculate your cost basis for tax purposes, you can use LIFO method.

Which means that you take your last 30 shares that you bought in May and multiply it by May price of $120, giving you $3600. And then you take the rest 10 shares from the first batch of shares you purchased back in January for $100, giving you $1000.

So, your total cost basis for 40 shares using LIFO method would be $3600 plus $1000 which equals $4600. And since your total profit was $5000, your taxable gain is simply the difference between the sell price and the cost basis, which is $5000 minus $4600 and it equals $400.

Using different methods for calculating your cost basis, such as for example FIFO, LIFO, or average cost basis, might give you different results. Which might increase or decrease your taxes.

Please compare it with FIFO method that I used in my previous video and you will see how your taxable gain becomes different.

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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.

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