Average single category cost basis is used to determine the amount originally invested in a mutual fund. It is a simplified method that uses an average price paid, no matter how long each share was held. It is a handy tool when calculating capital gains and losses for tax purposes. This is especially true when the mutual fund was purchased in varying amounts on several occasions and records of the transactions are difficult to find.
Related Searches:
Difficulty:
Easy
Instructions
How to Calculate Average Single Category Cost Basis
1
Figure out how many shares of the mutual fund you sold. This is the number of shares you will factor into your average single category cost basis.
2
Check your records to see what you paid for the shares you sold. It is common for these shares to have been purchased on several different occasions at different prices.
3
Factor in reinvested dividends and reinvested capital gains. They count as money you invested in the mutual fund.
4
Add together what you paid for the shares then divide by the number of shares you sold. This is your average single category cost basis.
5
Understand the tax ramifications of average single category cost basis. It assumes that the first shares you purchased are also the first shares sold. This benefits you. Shares held more than one year are taxed at a lower rate than those held for less than one year. Your older shares are more likely to incur fewer taxes.
6
Realize that you might be able to save more in taxes if you use specific share identification instead of average single category cost basis. To use specific share identification, you must have records of all share purchases and sales complete with dates, prices and number of shares transacted. The specific capital gains need to be calculated which involves much more paperwork than average single category cost basis. However, it can result in a lower tax bill.
Tips & Warnings
Most mutual fund companies will calculate average single category cost basis for you. If they do, they will include it on your year-end tax documents.
It is important to note that average single category cost basis can only be used with mutual fund shares. The Internal Revenue Service does not allow you to use it for individual stocks.
Correctly calculating the capital gain on stock acquired from exercise of stock options requires identifying the factors affecting cost basis. There are...
When purchasing stocks periodically throughout your career through an employer stock purchase plan (ESPP), calculating cost basis can get a little confusing....
