a basic question about average share price

[nun]

When calculating the average share price to work out your cost basis, I assume its an average weighted by the number of shares in each transaction. Is that right?

Also don't you get the same cost basis by simply adding up all the dollar amounts of your purchases and subtracting any sales - which is a slightly simpler calculation.

[Leonidas]

Is your question regarding figuring cost basis for tax purposes on the sales of individual stocks? If so, the answer to your question is no. Your basis is what you paid for each share. You have to be able to identify the cost basis for each share you sell. The IRS is going to want accurate numbers. If there is a reason you can't do that for all shares, I think you're stuck with using the earliest per share price.

Mutual fund shares are a little different. I think you can choose either FIFO, LIFO or an average. Capital gains distributions can make figuring cost basis a little more complicated with funds though. The fund or your broker should be able to give you a number to use on your Schedule D.

If you're just trying to keep track of how well an investment is performing I guess your method would work.

[nun]

Quote:

Originally Posted by Leonidas Mutual fund shares are a little different. I think you can choose either FIFO, LIFO or an average. Capital gains distributions can make figuring cost basis a little more complicated with funds though. The fund or your broker should be able to give you a number to use on your Schedule D. If you're just trying to keep track of how well an investment is performing I guess your method would work.

My question is for mutual funds doing FIFO. I sold all of my shares in a mutual fund recently and I'm having to work out the cost basis myself, so I just divided the shares into two lots, those I've owned for more than a year and those for less than a year, then added up all my purchases and capital gain reinvestments and subtracted the redemptions to get my LT and ST cost basis. Also I just type in various where the Schedule D asks me for purchase dates.

[jazz4cash]

every mutual fund I own sends me all this info on two forms. One form is the 1099 which identifies income/dividends and ST vs LT. The other is an individualized avg cost basis statement which is not req'd by IRS, but most funds provide automatically or if you ask.

[LOL!]

We use FIFO when selling mutual funds. We just get out our annual statements and start where we last sold shares. Then you just knock of the shares from that beginning as you wrote. We don't use "average" share basis.

You should just add up the cost of the shares you sold this time. I do not see how shares you sold a previous time have anything to do with selling shares this time. You do divide shares into the long term and short term ones. You can use "various" for the "date acquired" if you like, or you can put each separate date acquired on their own separate line.

Also, I do not believe "LIFO" is a legal way to do this -- contrary to what Leonidas suggested.

[kaneohe]

None----In response to your original question, you are correct that average share price is the individual price of each separate group weighted by the number of shares in that group and divided by the total number of shares in that group. As you suggest that means the numerator is simply the sum of the individual costs (or net costs if you sold part of the shares previously). The denominator would be the sum of the individual shares (or net shares if you sold some previously).

[Delawaredave]

Quote:

Originally Posted by LOL! Also, I do not believe "LIFO" is a legal way to do this -- contrary to what Leonidas suggested.

Looks like you can do FIFO, average cost, or specific lots for mutual funds, and LIFO or FIFO or specific shares for stocks

http://www.investopedia.com/articles/05/taxlots.asp

Using Tax Lots to Your Advantage
Your choice of cost basis method can have a significant effect on the computation of capital gains and losses when you sell shares. For mutual fund shares, there are three common ways to identify the cost basis of the shares that you are selling: FIFO (first-in, first-out), average-cost method and specific-share method. For stocks, you could use FIFO, LIFO (last-in, first out) or specific shares.

[d]

Quote:

Your choice of cost basis method can have a significant effect on the computation of capital gains and losses when you sell shares

obviously true, but i believe that once you have started using a particular method you must continue to use that very same method, with the result that you might well offset your near term benefits with greater future taxes.

[Leonidas]

Quote:

Originally Posted by LOL! Also, I do not believe "LIFO" is a legal way to do this -- contrary to what Leonidas suggested.

You are correct. Beg pardon of the OP for my ignorance, it's been a while since I owned any funds.

The IRS sez:

Quote:

You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund. To figure cost basis, you can choose one of the following methods. * Specific share identification. * First-in first-out (FIFO).

Also, you can use one of two averaging methods.

Quote:

You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares. To figure average basis, you can use one of the following methods. * Single-category method. * Double-category method. Once you elect to use an average basis, you must continue to use it for all accounts in the same fund. (You must also continue to use the same method.) However, you may use the cost basis (or a different method of figuring the average basis) for shares in other funds, even those within the same family of funds. Under the single-category method, you find the average basis of all shares owned at the time of each disposition, regardless of how long you owned them. Include shares acquired with reinvested dividends or capital gain distributions.

For details, read IRS Pub 564 http://www.irs.gov/publications/p564/ar02.html#d0e764

Modified to add: You could effectively pull off LIFO (although that is not OP's situation since he's sold the entire holdings) by doing share identification. Just ID the shares sold as the last ones bought. As far as I can see there is nothing wrong with doing it that way, but you would have to make sure that the sale slip indicated the ID information on what you sold.

[nun]

Quote:

Originally Posted by kaneohe None----In response to your original question, you are correct that average share price is the individual price of each separate group weighted by the number of shares in that group and divided by the total number of shares in that group. As you suggest that means the numerator is simply the sum of the individual costs (or net costs if you sold part of the shares previously). The denominator would be the sum of the individual shares (or net shares if you sold some previously).

Thanks to LOL and kaneohe, answers that are clear and actually addresses the orignal queston. This is very refreshing.

[Texas Proud]

Just to be a bit technical....

If you use the 'specific shares', then you can chose LIFO... you just say I am selling the LAST shares I bought... on your specific sale... magically it is LIFO..

[Leonidas]

Quote:

Originally Posted by none Thanks to LOL and kaneohe, answers that are clear and actually addresses the orignal queston. This is very refreshing.

Gee, I'm not sure about Jazz4Cash, d, or Delawaredave, but I'm personally embarrassed that my attempts to answer your question were unsatisfactory and unrefreshing.