Cost basis per item is easy to talk about when every item is one-of-a-kind — a single thrifted jacket, a single graded record. It gets genuinely ambiguous the moment you buy the same thing twice. You grab a pair of a popular sneaker at a liquidation sale in March for $40, find two more pairs of the same size in a May lot at $55 each, then pick up two more in July at $70 each. You now hold seven physically identical units at three different costs. Sell four of them, and the honest question — which four dollars did you actually spend? — doesn't have an obvious answer.
Most resellers never pick an answer. They let their spreadsheet or their memory pick one for them, inconsistently, sale to sale. Here's what the IRS actually permits, and which method fits reselling.
The three real options
First-in, first-out (FIFO). The oldest unit in stock is treated as the one that sold. Simple to apply, requires no per-unit tracking, and it's the default nearly every inventory and accounting tool ships with. For identical, interchangeable units — the same shoe, the same book edition, the same sealed toy — FIFO is a defensible stand-in for reality even when you genuinely can't tell which physical pair left the shelf.
Specific identification. You track which exact physical unit sold — by serial number, by bin, by the receipt you matched it to at intake — and use that unit's real cost. This isn't really optional for one-of-a-kind resale goods (vintage clothing, a specific vinyl pressing, anything thrifted): there is no "first in" when no two units are alike, so specific identification is less a choice than a description of what you're already doing.
Average cost. Pool the cost of every unit of a SKU currently in stock and divide by quantity. Simplest to maintain — one number per SKU instead of per unit — but it smooths away the fact that some units were a great buy and some weren't, which is exactly the signal a reseller needs to know what's worth sourcing again.
A fourth method, LIFO (last-in, first-out), is technically available but requires filing an election on Form 970 and then keeping your tax books and your financial books in LIFO lockstep every year after — the book-tax conformity rule. It exists to help large inventory-heavy businesses manage taxable income during rising costs; the paperwork overhead makes it a poor fit for a reseller running this as a side business or small shop.
A worked example
Same sneaker, same size, bought three times:
- March: 2 units at $40 = $80
- May: 3 units at $55 = $165
- July: 2 units at $70 = $140
- Total: 7 units on hand, $385 total cost
You sell 4 units in August at $90 each — $360 in revenue.
- FIFO: the 4 oldest units are the 2 March units and 2 of the May
- units. Cost = (2 × $40) + (2 × $55) = $190. Reported profit: $170.
- Average cost: $385 ÷ 7 = $55.00/unit. Cost for 4 units = $220.
- Reported profit: $140.
- Specific identification: depends entirely on which physical pairs
- you actually shipped. Ship the 2 July pairs and 2 May pairs and cost is
- (2 × $70) + (2 × $55) = $250 — reported profit $110. Ship the
- cheapest pairs first and you're back near the FIFO number.
Same seven units, same four sales, same $360 in revenue — and depending on the method, reported profit swings from $110 to $170. None of those numbers is wrong. What's wrong is not picking one and sticking with it, because that's when a spreadsheet quietly grabs whichever cost is most convenient that week, and your profit-and-loss stops meaning anything.
What the IRS actually requires
Two things matter more than which method you pick: consistency, and whether you have to formally track inventory at all.
Consistency. Whichever of FIFO, specific identification, or average cost you use, the IRS expects it applied the same way sale after sale, year after year — not switched around to whatever produces a better number this quarter. Changing methods later isn't a spreadsheet edit; talk to a CPA before you do it.
The small-business exception. Under IRC §471(c) (as amended by the 2017 Tax Cuts and Jobs Act, still in force for 2026), a taxpayer whose average annual gross receipts over the prior three years don't exceed an inflation-adjusted threshold — $32,000,000 for tax years beginning in 2026, per Rev. Proc. 2025-32 — isn't required to account for inventory under the standard rules at all. A qualifying small business can instead treat inventory as non-incidental materials and supplies, or simply conform to whatever method it already uses in its own books.
Virtually every individual reseller clears that threshold with room to spare — $32M a year is not a side-hustle number. What that exception buys you is flexibility in how formally the IRS makes you track inventory, not an excuse to skip costing altogether. You still need to know what a specific sale actually cost you if you want your profit number to mean anything, which is the whole reason cost-basis tracking exists in the first place — the same argument we made in the per-item vs. per-lot cost basis post.
Which one to actually use
- Buying multiples of the same SKU (repeat sourcing runs on a popular
- shoe, a restocked item) — FIFO. It's the sane default, it's what
- off-the-shelf tools assume, and it doesn't require you to physically
- track which unit is which.
- One-of-a-kind resale (thrifted, vintage, graded vinyl) —
- specific identification, because there's no meaningful alternative
- when every unit really is different.
- Average cost is fine for bookkeeping simplicity if you genuinely
- don't care about per-unit profitability, but most resellers do care —
- it's how you find out the July lot was a worse buy than the March one.
What to actually do
- Pick a method per SKU type and write it down. FIFO for repeat
- identical stock, specific identification for one-offs. Apply it the
- same way every time.
- **Don't let "cost" mean whatever number is easiest to find at sale
- time.** That's how average-cost-by-accident happens even when nobody
- chose it.
- Keep the intake record. FIFO and specific identification both
- depend on knowing what you paid and when — if that only lives in your
- head, neither method survives contact with a real tax return.
PalmFlow assigns cost basis to each individual unit at intake, not to a pooled SKU total — so a repeat-purchased sneaker bought in March, May, and July each keeps its own recorded cost, and whichever costing convention you apply to decide which unit sold, that unit's real number is the one that follows it to the sale. Free plan, 50 items, no card required.
Disclaimer: this is not tax advice. Inventory costing elections and the §471(c) small-business exception depend on your specific situation — confirm with a CPA before choosing or changing a method.