Specific Share Identification

DEFINITION of 'Specific Share Identification'

A method of choosing the exact shares to be sold in order to obtain the most favorable tax treatment when selling a portion of a holding that was purchased on several different dates and at several different prices. Specific share identification requires investors to give special instructions to the brokerage firm executing the trade.

It also requires investors to keep detailed records that show their cost basis for each sale. Specific share identification is especially useful for avoiding capital gains taxes when selling only a portion of a holding in which the investor has an overall loss.

BREAKING DOWN 'Specific Share Identification'

Investors may incur substantially different amounts of income tax liability depending on which of four methods they choose for identifying which shares they've sold. First in, first out (FIFO) is the most common method; it's also the method that the IRS assumes you are using unless you specify otherwise.

FIFO assumes that the first shares you purchased are the first ones you sold. Less common and more complicated methods for identifying shares sold include single-category averaging (used primarily by mutual fund companies) and double-category averaging (rarely used).