How to Define Cost Basis
Learn the definition of cost basis., Know who calculates the cost basis., Understand why you need to calculate the cost basis., Understand the three methods for calculating the cost basis.
Step-by-Step Guide
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Step 1: Learn the definition of cost basis.
Cost basis is the original value of an asset, such as stocks, bond, mutual funds.
You begin with the original purchase price, and then you adjust it for commissions, stock splits, dividends, return of capital or any other transaction that affects the original value of the asset.
Once you know the cost basis, you can compare it to the amount for which you sold the asset in order to calculate capital gains or losses.
You need to know capital gains for tax purposes.It is also known as the tax basis. -
Step 2: Know who calculates the cost basis.
The cost basis is calculated by your stockbroker or mutual fund company for stocks purchased after 2011 or mutual funds purchased after
2012.
If you invest without a stock broker, you will need to calculate the cost basis of your assets yourself in order to do your taxes.For stocks purchased in 2011 or later and mutual funds or exchange traded funds (ETS’s) purchase in 2012 or later, the stock broker or mutual fund company is required to calculate the cost basis and report it to the IRS.For earlier investments, you will need to do the calculation yourself and keep the information for your tax records., If you sell stocks, bonds or other assets, you will have a gain or loss.
The Internal Revenue Service (IRS) mandates that you report all capital gains and losses on your annual income tax return.
In order to accurately calculate the amount of the gain or loss, you first need to know the original starting value of the asset.
This is the cost basis., The IRS provides different methods of calculating cost basis depending on the type of asset.
For mutual funds and other equities, there are up to eight different kinds of cost basis accounting methods.
The most common include first in first out (oldest shares sold first), last in first out (newest shares sold first), high cost first out, low cost first out, and the average cost method.
The more detailed methods result in more accurate calculations, which may affect the amount you end up paying in taxes.
You can work with your broker or mutual fund company to choose which method you want them to use to calculate the cost basis of your assets.The first method is the first in, first out (FIFO) method.
This assumes that when you sell, you will sell your oldest assets first.
So the cost basis is based on your oldest assets.The second method is the specific share identification method.
In this method, the cost basis is calculated based on the specific shares you sold.The third method is the average basis.
In this method, the cost basis is calculated based on the average value of all of your assets. -
Step 3: Understand why you need to calculate the cost basis.
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Step 4: Understand the three methods for calculating the cost basis.
Detailed Guide
Cost basis is the original value of an asset, such as stocks, bond, mutual funds.
You begin with the original purchase price, and then you adjust it for commissions, stock splits, dividends, return of capital or any other transaction that affects the original value of the asset.
Once you know the cost basis, you can compare it to the amount for which you sold the asset in order to calculate capital gains or losses.
You need to know capital gains for tax purposes.It is also known as the tax basis.
The cost basis is calculated by your stockbroker or mutual fund company for stocks purchased after 2011 or mutual funds purchased after
2012.
If you invest without a stock broker, you will need to calculate the cost basis of your assets yourself in order to do your taxes.For stocks purchased in 2011 or later and mutual funds or exchange traded funds (ETS’s) purchase in 2012 or later, the stock broker or mutual fund company is required to calculate the cost basis and report it to the IRS.For earlier investments, you will need to do the calculation yourself and keep the information for your tax records., If you sell stocks, bonds or other assets, you will have a gain or loss.
The Internal Revenue Service (IRS) mandates that you report all capital gains and losses on your annual income tax return.
In order to accurately calculate the amount of the gain or loss, you first need to know the original starting value of the asset.
This is the cost basis., The IRS provides different methods of calculating cost basis depending on the type of asset.
For mutual funds and other equities, there are up to eight different kinds of cost basis accounting methods.
The most common include first in first out (oldest shares sold first), last in first out (newest shares sold first), high cost first out, low cost first out, and the average cost method.
The more detailed methods result in more accurate calculations, which may affect the amount you end up paying in taxes.
You can work with your broker or mutual fund company to choose which method you want them to use to calculate the cost basis of your assets.The first method is the first in, first out (FIFO) method.
This assumes that when you sell, you will sell your oldest assets first.
So the cost basis is based on your oldest assets.The second method is the specific share identification method.
In this method, the cost basis is calculated based on the specific shares you sold.The third method is the average basis.
In this method, the cost basis is calculated based on the average value of all of your assets.
About the Author
Zachary Perry
Committed to making home improvement accessible and understandable for everyone.
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