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Cost Basis Calculation Methods:
Average Cost: Total cost of all shares divided by total number of shares
FIFO (First-In, First-Out): First shares purchased are first sold
LIFO (Last-In, First-Out): Last shares purchased are first sold
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Cost basis is the original value of an asset for tax purposes, usually the purchase price adjusted for stock splits, dividends, and return of capital distributions. It's used to calculate capital gains or losses when shares are sold.
The three main methods for calculating cost basis are:
Average Cost: Total investment ÷ Total shares owned
FIFO (First-In, First-Out): First shares purchased are first sold
LIFO (Last-In, First-Out): Last shares purchased are first sold
Key Differences:
Details: Accurate cost basis calculation is essential for determining capital gains taxes. The method you choose can significantly impact your tax liability when selling mutual fund shares.
Tips: Select your cost basis method, enter the number of shares, price per share, and total cost basis. The calculator will determine your cost basis per share according to the selected method.
Q1: Which cost basis method is best?
A: It depends on your tax situation. Average cost is simplest, while FIFO or LIFO may offer tax advantages in certain market conditions.
Q2: Can I change my cost basis method?
A: For mutual funds, you can typically change methods before selling shares. Once shares are sold using a method, that method must be used for those shares.
Q3: Is average cost required for mutual funds?
A: No, but it's commonly used and often the default method if you don't specify another method.
Q4: How does dividend reinvestment affect cost basis?
A: Reinvested dividends increase your cost basis as they represent additional purchases of shares.
Q5: What about specific identification method?
A: Some brokers allow you to specify exactly which shares to sell, which can be optimal for tax planning but requires careful record-keeping.