The Specific Identification method is the most flexible in terms of controlling your tax liability. You can pick and choose which tax lots you want to sell based on how much taxable gain or loss you want to recognize.
To use this method, you need to do two things: 1. Keep good cost basis records. 2. Identify the specific tax lot (meaning the purchase date of the shares that you want to sell) and inform the broker before the trade is executed. This is called a "versus purchase" trade. It is often denoted by "VSP" with the original tax lot purchase date printed on the trade confirmation for the sale in order to document that the specific identification method was used. It is a good idea to remind your broker that you want the "VSP" and tax lot date to appear on the trade confirmation for tax purposes.
This method is the most useful one for minimizing your income tax liability. If you need to liquidate some shares, you can choose the highest cost ones (which were usually the most recent purchases) as your tax lots.
