1. What is Average Cost Basis?

Average Cost Basis is a method used to determine the cost of investments for tax purposes. It represents the average price paid per share when multiple purchases of the same security have been made at different prices and times.

2. How Does the Calculator Work?

The calculator uses the Average Cost Basis formula:

Where:

• \( \text{Total Cost} \) — Sum of all purchase costs (currency)
• \( \text{Total Shares} \) — Total number of shares purchased (unitless)
• \( \text{Average Cost Basis} \) — Per share tax basis (currency/share)

Explanation: This method calculates the weighted average price of all shares purchased, providing a single cost basis for tax reporting purposes.

3. Importance of Average Cost Basis Calculation

Details: Accurate cost basis calculation is essential for determining capital gains or losses when selling investments, which directly impacts tax liability and investment strategy decisions.

4. Using the Calculator

Tips: Enter total cost in currency units and total shares as a number. Both values must be positive numbers greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between average cost basis and FIFO?
A: Average cost basis uses the average price of all shares, while FIFO (First-In, First-Out) assumes the first shares purchased are the first ones sold.

Q2: Can I change my cost basis method after using it?
A: Once you use a cost basis method for a particular security, you generally cannot change it without IRS approval for that security.

Q3: Does average cost basis include commissions and fees?
A: Yes, total cost should include all commissions, fees, and other acquisition costs to ensure accurate cost basis calculation.

Q4: Is average cost basis mandatory for all investments?
A: No, investors can choose between different cost basis methods including specific identification, FIFO, LIFO, or average cost basis.

Q5: How does average cost basis affect tax reporting?
A: It determines the cost used to calculate capital gains when shares are sold, which directly impacts the amount of taxes owed on investment profits.