Capital Gains: Average cost / FIFO / LIFO

Encouraged by the helpful answers to my question this morning, I dare posting another one, thanks for your help in advance.

I (non US taxable person) gave a share gift to my wife (US taxable person) in the previous tax year. This is to make use of her UK capital gains tax allowance and realise some capital gain tax free (in the UK). Now of course this is reportable in the US. My question is how the capital gains will be calculated for US tax purposes:

Option 1: Average cost basis - this is the method employed in the UK (to my knowledge), so the total cost for the shares over time divided by the total amount of shares bought over time is the average cost basis; I would apply the same, however, given that form 8949 asks for a purchase date, I thought maybe that is not what the US requires (the shares were bought across several dates, so there isn't one purchase date)
Option 2: FIFO (first in, first out) - I could divide the shares into lots in order of when they were bought - then calculate the capital gains starting with the earliest purchase (this would lead to the highest possible capital gains)
Option 3: LIFO (last in, first out) - I could divide the shares into lots and calculate the capital gains starting with the most recent purchase (this would lead to the lowest possible capital gain)

This also has an implication on whether or not the capital gain is considered short term or long term. For Option 2 and 3 I could use the actual purchase date of the shares (in my account) - for FIFO most of the transaction would then be over 1 year hold period, for Option 1 I could use the "gift date", which would be below 1 year.

Has anyone encountered this issue before and knows how to address?

Before moving to the UK we put all our shares into ETFs in my wife’s name for the same reason, to utilize the tax free allowances as I had pensions and she had no other income.

We don’t use any of the 3 methods listed above. We identify which particular shares we want to sell. We’ve done this long before we left the USA but it is particularly useful now because exchange rates make a huge difference.  Not sure if average share price works with HMRC because there is no actual date of shares purchase, how do you figure the value in £s of the shares when they were bought.

Thanks for the response. The way to figure out average share price is simply to add up the amount paid for all purchases and divide it by the total number of shares held. When you sell, you therefore do not have to specify which shares are sold, but they are just removed at the same average basis. For example:
If you buy 50 shares at t=0 at 10 dollars per share and 100 shares at t=10 at 15 dollars a share, your average cost basis would be (50*$10+100*$15)/150 = $2000/150 = $13.33 per share.

I actually found some evidence that the US may consider the average basis method in the instructions of Form 8949, it still begs the question whether I can then categorise these sales as long term for capital gains purposes, because you start mixing purchase dates. I think I will do what you suggested and just select specific shares to be sold.

Average basis. You can use the average basis method to determine the basis of shares of stock if the shares are identical to each other, you acquired them at different prices and left them in an account with a custodian or agent, and either:
• They are shares in a mutual fund (or other regulated investment company);
• They are shares you hold in connection with a dividend reinvestment plan (DRP), and all the shares you hold in connection with the DRP are treated as covered securities (defined below); or
• You acquired them after 2011 in connection with a DRP.

Shares are identical if they have the same CUSIP number, except that shares of stock in a DRP aren't identical to shares of stock that aren't in a DRP, even if they have the same CUSIP number. (CUSIP numbers are security identification numbers.)
If you are using the average basis method and received a Form 1099-B (or substitute statement) that shows an incorrect basis, enter “B” in column (f),
enter the basis shown on Form 1099-B (or substitute statement) in column (e), and see How To Complete Form 8949, Columns (f) and (g), later. For details on making the election and figuring average basis, see section 1012, Pub. 550, and Regulations section 1.1012-1(e).

Gotcha, I forgot that you were asking about the US tax return, not the HMRC return. 

I used to use average cost basis all the time when we lived in the USA and owned mutual funds, so much easier than tracking individual purchases since for most of the time I was letting the dividends and capital gain distributions reinvest. A year before moved back to England I converted them to HMRC Reporting ETFs and also switched to "specific id" so I could pick and choose which shares to sell.  I also don't reinvest any more but let the distributions collect in the money market sweep fund before deciding what to do with them. (I usually transfer them to our bank these days since we are retired now for 11 years and well into our "distribution phase").

On an HMRC SA for "purchase date" they don't have the same option, that I can see, of "various" that is allowed on the IRS tax form for average cost basis.  When I am ready to sell shares I can look up the date of purchase exchange rate and calculate the capital gain in £s which varies wildly from the gain in $s as the exchange rate swings about.

Thanks for the helpful response!