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Definition: Tax Lot Accounting
Tax Lot Accounting is a method of maintaining archives for tracking historical costs, date of purchase and sale and volume of the trade for each of the security in a portfolio. The main purpose for adopting Tax Lot Accounting is to save on capital gain taxes by preventing the unknown historical dates of purchase and sale.
The companies records its every transaction so that the exact lot amount could be accounted for tax purposes as on the date of sale instead of the current price of the security which could be higher than what the price was on the date of sale. There can be different ways for calculating the cost basis i.e. determining the original value of the security which are FIFO, LIFO etc. The accountants choose the methods of cost basis depending on what could reduce their profits on books to lessen the tax. Thus tax lot accounting helps to save taxes.
For Example: A company initially purchases 100 shares for $10 per share on 10th of January. Then it sells 50 shares for $12 on 12th of January. This means gain of $200 is now taxable. Now it again sells another 20 shares for $15 on 15th of January which means a gain of $100. Now this $100 is taxable. This means the tax is applied lot wise and this is known as tax lot accounting.