To figure the cost basis when the shares you are selling were purchased at various times and at different prices, you have several methods available, depending on your specific circumstances and the type of securities involved. Here are the key methods and rules:
- Specific Identification Method:
- If you can adequately identify the shares of stock you sold, their basis is the cost or other basis of the particular shares. Adequate identification can be made by showing that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. You must receive a written confirmation of this from your broker or other agent within a reasonable time.
- First-In, First-Out (FIFO) Method:
- If you cannot adequately identify the shares you sold, the basis of the stock sold is determined using the FIFO method. This means the basis of the shares you acquired first is used to figure the basis of the stock sold. This method assumes that the first shares you purchased are the first ones you sold.
- Average Basis Method:
- For certain types of securities, such as mutual fund shares and shares in a dividend reinvestment plan, you can use the average basis method. To calculate the average basis:
- Add up the cost of all the shares you own in the mutual fund.
- Divide that result by the total number of shares you own. This gives you your average per share.
- Multiply the average per share by the number of shares sold.
- To use the average basis method, you must elect to do so. For covered securities, you notify the custodian or agent in writing by any reasonable means. For noncovered securities, you make the election on your income tax return for the first taxable year for which the election applies.
- Broker Reporting:
- For each sale of a covered security, the broker is required to provide you with basis information on Form 1099-B. This includes the date of acquisition, whether the gain or loss is short-term or long-term, cost or other basis, and any loss disallowed due to a wash sale or the amount of accrued market discount.
- Record Keeping:
- You are required to keep and maintain records that identify the basis of all capital assets. This includes maintaining records of the purchase price, commissions, and any other costs associated with acquiring the shares.
By following these methods and maintaining accurate records, you can determine the cost basis of the shares you are selling, even if they were purchased at various times and at different prices.
Sources:
Rev. Proc. 2011-35
Publication 550 (2023)
Rev. Proc. 2010-13
§ 1.1012-1. Basis of property.
Publication 551 (12/2022)
