What's the Difference among Methods for Calculating Cost Basis?
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What's the Difference among Methods for Calculating Cost Basis?
Which method works best varies from situation to situation.
Let’s take an example. Robert bought 25 shares of the no-load BigCompany Fund at $9 apiece in 2017. He purchased another 50 shares at $10 apiece in 2019, and 25 shares at $11 each in 2021. In early 2022, he decided to sell 30 of his 100 shares at $12 apiece, for a total sale of $360. Assuming all his gains are long term, which method for calculating cost basis should he use, and what will his taxable gains be?
Using FIFO
If Robert uses FIFO, he’d sell his oldest shares first. The calculation:
(25 x $9) + (5 x $10) = $275 cost basis
His taxable gains would be his total sale minus his cost basis, or:
$360 - $275 = $85
Using specific shares
If Robert chooses the specific-shares method, he’d sell his most expensive shares first.
(25 x $11) + (5 x $10) = $325 cost basis
His taxable gains would be:
$360 - $325 = $35
Using single-category
If Robert goes the single-category averaging route, he’d divide the total cost of shares by the total number of shares owned to get his average share price. He’d then multiple by number of shares sold for total cost basis.
His taxable gains would be:
$360 - $300 = $60
Using double-category
Robert can’t use the double-category averaging method, because all his gains are long term.
Robert minimizes his taxable gains by using the specific-shares method: His taxable gains are just $35 versus $85 under FIFO and $60 using the single-category averaging method. With a little effort and a calculator, you can reduce Uncle Sam’s take, too.