Average Cost Basis

  

It's a tax issue. The IRS is really interested in how many gains or losses you make on your mutual funds, stock purchases and other investments because they want to be sure to tax you on your gains. The average cost basis is one way to arrive at an answer.

Basically, you tally up everything and divide by the number of shares to get the number. Example: You liked AT&T at $40 a share. You bought 500 shares. You liked it even more at $35 and bought 1,000 shares. You loved it at $30 and bought 2,000 shares. You adored it at $25 and bought 5,000 shares. Add up the total shares you purchased and figure out the total you paid for everything. Then divide the amount you paid by the shares you have. That gives you an average cost basis is $28.24 (forget commissions).

The stock then went to $50 and you sold half your holdings, or 4,250 shares. How much gain was there? Well, you take the average cost in for half of your shares, and you match it with the average cost out. In this case, you are realizing gains per share of $50 - $28.24 or $21.76 x 4,250 shares or $92,480.

Related or Semi-related Video

Finance: What is Tax Basis?8 Views

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Finance allah shmoop What is tax basis Well your basis

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is your cost Your costs for assessing how much you

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owe when the tax man coming you bought a thousand

00:16

shares of whatever dot com at twelve bucks a share

00:19

in its eye po and huzzah Three years later the

00:22

stock is at thirty You decide whatever dot com is

00:26

now passe because a kardashians said so it'll be over

00:30

taken by whenever dot com and you want to sell

00:33

So you dio and you live in a thirty percent

00:35

marginal tax blue state And that is your federal tax

00:39

rates in twenty percent But then you add in ten

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percent for state taxes and whatever's left for obamacare and

00:45

you pay about thirty percent tax on your gains Well

00:48

you paid twelve grand to buy the stock and after

00:51

the sale you took in thirty grand when you sold

00:55

it for a gain of eighteen thousand dollars Your tax

00:59

basis on those shares is twelve grand so you pay

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thirty percent tax on the eighteen grand of gain or

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fifty four hundred dollars to net from the sale of

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thirty thousand dollars worth of stock How much Yeah twenty

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Four thousand six hundred dollars He fancy math Had you

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just gotten those shares free I'ii they were gifted to

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you and you had no tax basis or a tax

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basis of zero dollars a share Well then your gain

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would have been from zero to thirty grand or a

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gain of thirty thousand dollars to then be taxed at

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thirty percent or nine grand in taxes to net just

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twenty one thousand dollars after the sale So having ah

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high tax basis or at least being able teo point

01:45

toe one saves you money when the tax man coming

01:48

and well that's pretty much it alright he's gone Now

01:51

you can all come out Come on it's Okay it's 00:01:53.698 --> [endTime] safe

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