First in, first out (referred to as FIFO and pronounced to rhyme with a dog's name). This method assumes that you sell your oldest shares and continue to sell shares in the order you bought them. If you don't specify the way you calculated your gain or loss, the IRS will assume you used FIFO.

For example, suppose you sold some other asset at a loss. Tax law allows you to deduct capital losses against capital gains, but it limits individuals to $3,000 in capital loss deductions against other types of income. If you have losses that would have to be carried forward because they exceeded the limit, you might specify fund shares that give you a big gain and then use that gain to offset the loss on the other asset.

Average basis, single category. Using this method, you average the cost of your shares and use that as the basis for calculating gains and losses. While this method allows less opportunity to manage tax liabilities, it simplifies calculations for the shareholder who has a large number of transactions.