How to calculate gain/loss (for tax purpose)

[goodrookie]

Hypothetical example. Let's say I bought XYZ on three different occasions and later sold some of it. Do I calculate the profit from the lowest cost, highest cost or the average cost?

E.g
30 stocks of XYZ @ $100
40 stocks of XYZ @ $110
20 stocks of XYZ @ $105

Then sold 20 stocks of XYZ at $130.
For tax purposes, is my profit 20*(130-100)=$600 or 20*(130-110)=$400 or 20*(130-105.56)=$488?

[johnny847]

Depends on which cost basis method you choose. http://www.bogleheads.org/wiki/Cost_basis_methods

[goodrookie]

Shouldn't the brokerage firm automatically do it to lower the tax liability for its customers? Why would they use FIFO rather than HIFO ?

[johnny847]

The brokerage does not have a fiduciary responsibility to act in your best interest.

Secondly, YOU choose the cost basis method. I do not believe it says anywhere on that page that a brokerage will always choose FIFO for you. If it does, it needs to be corrected.

[MDM]

Brokerage firms may have a default.  Common ones are FIFO and "lowest gain."

But the brokerage won't know about your other earnings for the year.  Thus you might want to take a "highest gain" if in that particular year your other income will be low and you expect to pay 0% on any capital gains.

Choosing it yourself - assuming you know why to choose - is always best.

To the OP's question:
For tax purposes, your profit is 20*130 - A*100 - B*110 - (20-A-B)*105
If you pick lots, you can have any of
0 <= A <=20
0 <= B <=20
0 <= A+B <=20

So you have a large number of possible answers.  Realistically, you probably want either A=20 or B=20, depending on whether you want to maximize or minimize your gain on the transaction.