This simplifies the calculation of cost basis but makes it harder to control the amount (and when) you pay in taxes by selling specific shares. This method divides the total amount you paid for each share you own by the number of shares you own, regardless of the amount you paid for each individual share.įor example, if you bought one share in January for $10 and one share in March for $20, the average cost method produces a cost basis of $15 for each share. With mutual funds and most ETFs, you can also choose to use the average cost of your shares when determining the cost basis of shares you sell. Which shares you choose determines the cost basis of the shares you sell and therefore the capital gain or loss in the transaction. With specific identification, you choose individual shares to sell. First-In, First-Out sells the shares you bought first. You can choose to sell shares in different ways. When you sell shares, you compare the price you sell the shares for with the price you paid to determine your gain or loss. When you buy a security like a stock or an ETF, each share you buy has a cost basis based on the price you paid.
For example, if you inherit a security from someone when he or she dies, its cost basis is usually the value of the security on the date of the person’s death. The cost basis for an investment can change in a few situations. With certain restrictions, you can subtract the loss from your income when you file your tax return. If you sell something for less than its cost basis, you’ve lost money on the investment. If you sell something for more than its cost basis, you earn a capital gain and typically pay taxes based on the gain you earned. Cost basis affects the tax implications of selling shares because it determines the capital gains or losses you book for the transaction. Generally, the cost basis for a stock or other security is the amount that you paid to buy the share. Cost basis is used to calculate capital gains taxes when you sell a security.
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