Understanding FIFO: How to calculate the cost basis of an asset

At finpension, we use the FIFO principle to calculate the cost basis of assets. We explain the term FIFO, how it can be used to calculate the cost basis and how it differs from the average cost basis method.

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FIFO for investments: What does first in, first out mean?

The FIFO principle (first in, first out) regulates the order in which securities are bought and sold. The securities bought first are also sold first. Unlike in other countries, the FIFO principle is not prescribed by law for private investors in Switzerland. This is because private investors in Switzerland do not have to pay tax on capital gains from securities.

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How can I calculate the cost basis?

The cost basis is the actual purchase price that you have paid for an investment such as an ETF. This also includes all additional costs incurred on purchase. These can be stamp duty or brokerage fees, for example.

It becomes more complicated as soon as you make purchases and sales. Then there are two methods for calculating the cost price:

1. With the FIFO method.
2. Using the average cost basis method.

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Calculate cost price with the FIFO principle

At finpension, we use the FIFO principle to calculate the cost basis. The calculation takes into account the fact that the first shares purchased are also the first to be sold. The acquisition cost is calculated on the basis of the purchase prices of the remaining assets.

The cost price according to the FIFO method is calculated as follows:

1. Multiply the number of units of each purchase by the respective cost price.
2. Add up the results of all purchases.
3. Divide the total by the total number of shares.

Example calculation with FIFO method

Here is an example. Let’s take a portfolio in which there were two purchases and one sale of the same asset:

In accordance with the FIFO principle, five of the shares acquired on 23 July 2020 were sold on 25 May 2022. The following portfolio is therefore included in the calculation of the acqusition cost:

In our example, you have a total of 7 parts left, for which the calculation of the cost basis is as follows:

(5 x 1,373.76 + 2 x 1,679.18) / 7 = 1,461.02

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Calculate acqusition cost using the average cost method

If the cost basis were calculated on the basis of cash flows without taking the FIFO principle into account, the cost basis would be different. In this case, the acqusition cost would even be lower than the lowest cost basis ever realised.

The reason for this not exactly intuitive result is that the sale of the five shares generated a profit and this profit depresses the average cost basis:

• The average acqusition cost before the sale of the five units was 1,424.66.
• The sale of five units therefore resulted in a profit of 781.98 (156.40 x 5 units).
• If this profit is distributed over the remaining 7 units (111.71), the basis cost is reduced to 1,312.95.

The acqusition cost according to the FIFO principle is more difficult to calculate. However, it provides more realistic results and prevents the basis cost from falling below the lowest purchase price ever realised.

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