Course 507:
Calculating Your Cost Basis
In this course
1 Introduction
2 First In, First Out (FIFO)
3 Specific Share Identification
4 Single-Category Averaging
5 Double-Category Averaging
6 What's the Difference?

Leave it to the IRS to complicate things.

The agency has pages and pages of tax laws and more forms than you can shake a stick at. It even has four ways of calculating something as simple as cost basis, or the price you paid for a security, including commissions and other expenses. Cost basis is important because you determine your profit (or loss) when you sell shares by subtracting your cost basis from the shares' current selling price. That difference is the amount the government taxes. (Note that these issues only apply to securities you hold in your taxable account. You can buy and sell shares in a tax-sheltered account like an IRA or 401(k) without facing tax consequences until you begin withdrawing the money.)

Cost basis may seem pretty straightforward—and it is, if you buy a security only at one point in time. But what if you've been investing a little bit in a fund over a period of years? That's when things get tricky. Choose one method for cost basis over the others and you may be able to keep more for yourself and give less to Uncle Sam.

Next: First In, First Out (FIFO) >>

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