The specific identification method assigns cost by tracking each individual unit, so the amount charged against a sale is the actual cost of the actual item that left. It is the only costing approach that makes no assumption at all about which unit moved, which is why it produces an exact answer and why it is the hardest one to defend without records.
That last part is the whole subject. Every other method is a rule you apply; this one is a claim you have to prove, and US tax law is specific about what the proof looks like.
Method Versus Assumption
FIFO and LIFO are cost-flow assumptions. They tell you which cost to charge without anyone knowing, or caring, which physical unit was picked. Specific identification is not an assumption at all, because it reports what actually happened to a particular unit.
The practical consequence is that specific identification only works where units are distinguishable. Serial-numbered equipment, individual vehicles, real property, jewelry and identifiable lots of securities all qualify. Interchangeable units in a silo or a bin generally do not, because there is nothing to identify.
The trade-off is control rather than accuracy. Because the seller chooses which unit to sell, the seller also chooses the reported gain, which is precisely why the identification has to be evidenced rather than asserted.
What the Regulation Requires for Securities
Securities are where the rules are written down most precisely, and the default runs against the taxpayer.
If a taxpayer sells or transfers shares of stock in a corporation that the taxpayer purchased or acquired on different dates or at different prices and the taxpayer does not adequately identify the lot from which the stock is sold or transferred, the stock sold or transferred is charged against the earliest lot the taxpayer purchased or acquired, to determine the basis and holding period of the stock (26 CFR 1.1012-1(c)(1)).
Read that as the penalty clause. Fail to identify and the oldest lot goes first, which is FIFO arriving by default rather than by choice. In a rising market that is usually the worst available answer for the taxpayer.
The regulation then says what identification means. An adequate identification is made if it is shown that certificates representing shares of stock from a lot which was purchased or acquired on a certain date or for a certain price were delivered to the taxpayer’s transferee (26 CFR 1.1012-1(c)(2)).
Certificates are rare now, so the operative rule is the one for stock held by a broker, and it has two limbs that both have to be satisfied. Where the stock is left in the custody of a broker or other agent, an adequate identification is made if, at the time of the sale or transfer, the taxpayer specifies to the broker or other agent having custody of the stock the particular stock to be sold or transferred, and within a reasonable time thereafter confirmation of that specification is set forth in a written document from the broker or other agent (26 CFR 1.1012-1(c)(3)).
Both limbs matter and they fail in different ways. The specification happens at the time of the sale, so deciding afterwards which lot you meant to sell, while preparing the return, is not an identification. The written confirmation is what makes the specification provable later, and a verbal instruction the broker never documented leaves the taxpayer with the first limb and not the second.
The Digital Asset Version
The same structure now reaches digital assets, with one accommodation the securities rules do not spell out the same way.
Where multiple units of the same digital asset are held in the custody of a broker, an adequate identification occurs if, no later than the date and time of the sale, disposition, or transfer, the taxpayer specifies to the broker having custody the particular units to be sold, disposed of, or transferred by reference to any identifier, such as purchase date and time or purchase price, that the broker designates as sufficiently specific to identify the units (26 CFR 1.1012-1(j)(3)).
The accommodation is standing instructions. A standing order or instruction for the specific identification of digital assets is treated as an adequate identification made at the time of sale, disposition, or transfer, and where a broker offers only one method of making a specific identification, that method is treated as a standing order or instruction (26 CFR 1.1012-1(j)(3)). The regulation also places the burden squarely: the taxpayer is responsible for maintaining records to substantiate the identification.
Where a US Firm Meets It
In two places, and they fail differently.
On an inventory, the question is whether the client’s system actually carries unit-level cost. A system that reports an average by SKU cannot support specific identification no matter what the client believes the policy is, and the workpaper has to record which one the numbers came from.
On a brokerage or exchange account, the question is documentary and it is about timing. Ask for the trade confirmations or the broker’s lot-selection record, not the year-end gain summary. A client who says they sold the high-basis lot, with nothing dated at or before the sale to show it, is on the earliest-lot default whatever the intention was.
Common Questions
A dealer holds three identical-looking vehicles bought at different prices and sells one. Under specific identification the cost charged is the cost of the vehicle that physically left the lot, traced by its identification number, rather than the oldest or newest cost in the account.
It is an accepted costing method, and it is typically the one used where units are individually tracked rather than interchangeable. The conditions that actually bite sit on the tax side: for securities the method is available only where the taxpayer specifies the lot at the time of the sale and the broker confirms that specification in writing within a reasonable time thereafter (26 CFR 1.1012-1(c)(3)).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms under layered review, and a trial task lets a firm’s own reviewer grade real work before any client file moves.
