Are you tired of trying to keep track of all your investments and their fluctuating values? Are you constantly second-guessing when it comes to tax season and which cost basis method to use? Well, fear not! The average cost basis method is here to save the day (and your sanity)!
So what exactly is this average cost basis method, you ask? It’s a simple and straightforward way of calculating the cost basis for your investments. Instead of individually tracking each purchase or sale, this method takes into account the total amount invested divided by the total number of shares owned.
Let’s break it down with an example. Imagine you bought 100 shares of XYZ Company at $10 per share on January 1st. Later in the year, you purchased an additional 50 shares at $12 per share. Using the average cost basis method, you would take the total amount invested ($1,000 + $600 = $1,600) divided by the total number of shares (100 + 50 = 150). Therefore, your average cost basis would be $10.67 per share.
Now let’s say that in March next year, you decide to sell 75 shares at $15 per share. Instead of having to determine which specific shares were sold and calculate each individual gain or loss separately using other methods like FIFO (First In First Out) or LIFO (Last In First Out), with average cost basis it’s much simpler.
Using our previous example where we determined an average cost basis of $10.67 per share, we can calculate our gain or loss by subtracting our selling price from our average cost: ($15 – $10.67) x 75 = $32.25 gain.
One great advantage of using this method is that it smooths out any market volatility as it considers all purchases equally rather than based on timing or price fluctuations. This helps simplify record-keeping and tax reporting, making your life a whole lot easier.
However, it’s important to note that once you choose the average cost basis method for a specific investment, you must stick with it for as long as you own that investment. So make sure to carefully consider which method is best for each of your investments before making any decisions.
In conclusion, the average cost basis method offers simplicity and ease when it comes to tracking and calculating gains or losses on your investments. By taking the total amount invested divided by the total number of shares owned, this method eliminates the need for complex calculations based on purchase or sale dates. So say goodbye to headaches during tax season and embrace the straightforwardness of average cost basis!