PMP or FIFO: which calculation method should we use?

When you make capital gains on the stock market, the amount of tax you pay directly depends on the calculation method used. There are two main methods to calculate your gains: FIFO and WAC.

Using one or the other can lead to different final results. So it’s important to understand the differences between the two.

The FIFO method (First In, First Out)

The FIFO principle means "First In, First Out". When you sell shares, this method assumes you are selling first the shares you bought first.

Example: You buy 1 share at €10, then later you buy 1 more share at €20. Then you sell 1 share at a price of €30.

Result: With FIFO, the share sold is considered to be the very first one, the one bought at €10. So your capital gain is €20 (€30 - €10).

All foreign brokers use this method (Interactive Brokers, Degiro…)

2. The WAC method (Weighted Average Cost)

WAC consists in taking an average of your different purchase prices, taking into account the quantities you bought.

Example: You buy 1 share at €10, then 1 share at €20.

Result: Your Weighted Average Price (WAP) is €15 ((€10 + €20) / 2). If you then sell 1 share at €30, your calculated capital gain will be €15 (€30 - €15).

As you can see, for the same sale and the same selling price, the calculated capital gain isn’t the same.

To be able to use this method, you need to know the full history of your transactions since the account was created.

What does the official rule say in France?

The official logic of the French tax authorities is clear: when you’ve bought securities of the same kind at different prices, the acquisition price to be used is a weighted average. Therefore, the WAP is the reference method in France.

The trap of foreign brokers

In practice, many foreign brokers (and the annual reports they provide) by default show capital gains calculated using the FIFO method.

The real problem comes up if you’ve already reported your gains in previous years based on the FIFO numbers given by your broker, and from one day to the next you decide to switch to the “pure” WAC method. This change of method can create a nasty side effect: you might end up paying extra tax on part of your gains that has already been taxed in the past.

What should you actually do in practice?

Even though WAC is the official method, the FIFO method is tolerated.

The tax authorities confirmed to us that they prefer taxpayers to rely on the annual account statements provided by their broker using FIFO (rather than recalculating everything themselves using WAC, which could be a big source of errors).

However, to make your tax situation as safe as possible, the “cleanest” approach would be to send a written message to the tax office (via the secure messaging in your personal online account) to ask them for confirmation and keep a written record of it.

Good to know: some of our clients prefer not to do this to avoid “drawing attention” in case of a potential tax audit.