The change would prompt Betterment to switch from the algorithm it currently uses to help investors identify the best lot to sell when selling a specific stock. The algorithm picks lots by first prioritizing losses before any gains. Within each category, the algorithm targets lots with the highest cost basis, which typically have smaller gains.
The company's algorithms are already set up to use first-in-first-out as a default method.
"If the rule is changed, we would just flip a switch," Benke said.
Betterment's selection strategy will still work with first-in-first-out, but would be "much less efficient," according to Benke.
A new charitable giving feature that Betterment recently launched would also be affected. That feature allows Betterment users to donate shares directly from their accounts to selected charities.
While the system currently targets users' most appreciated shares for charitable giving, the first-in-first-out method would have to be used instead, Benke said.
The change would also affect savers who are focused on shorter-term goals, such as those who are saving for a down payment for a house. Betterment typically uses a selection strategy to choose lots for those investments as well.
"We would have to do first-in-first-out for that, which would result in a larger tax bill typically," Benke said.
One bright spot in the first-in-first-out proposal is the Senate Finance Committee's recent elimination of mutual funds from the rule, Benke said. Fund companies will be able to use other lot selection strategies that could reduce taxes for investors. But there's still the risk that a fund company's selection might not be best for an individual investor's particular situation, he said.