Cost basis doesn't equal performance | Vanguard (2024)

FAQs

Why is cost basis not an accurate indicator of performance? ›

But here's what really happens: When the distribution is reinvested, it's added to your cost basis. Although the money was "earned" on the original investment by way of a distribution, it's not considered part of the investment's performance.

Cost basis is the amount you paid for an investment, but it isn't always what you paid when you purchased it. Reinvesting dividends or capital gains will increase your cost basis.

Selling the shares with the highest cost basis (the shares for which the investor paid the most), shows a smaller capital gain or a greater capital loss, reducing tax liability for a given year.

Cost basis is the original value of an asset for tax purposes, usually, the purchase price, adjusted for stock splits, dividends, and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset's cost basis and the current market value.

If you can't make this identification, the IRS says you need to use the first in, first out (FIFO) method. 1 Therefore, if you were to sell 1,500 shares, the first 1,000 shares would be based on the oldest cost basis of $10, followed by 500 shares at the newer cost basis of $5.

Purchase Records

If you purchased the asset, documents from the original sale are the preferred option for verifying cost basis. This can include any brokerage statements, commission statements or other proof of purchase for securities that you purchased.

If the cost basis information that is reported on your Form 1099-B is incorrect, you can report a correction to the IRS using Form 8949.

When you sell your stock, your cost basis should be adjusted so you don't pay taxes on this amount again.

First-in, first-out method (FIFO)

This is the default for all investments other than mutual funds. Method implications: Because asset prices tend to rise over time, using FIFO as your cost basis method will have the oldest shares sold first, and those shares will often have the lowest cost basis.

If you sell stocks for a profit, your earnings are known as capital gains and are subject to capital gains tax. Generally, any profit you make on the sale of an asset is taxable at either 0%, 15% or 20% if you held the shares for more than a year, or at your ordinary tax rate if you held the shares for a year or less.

How do I avoid paying taxes when I sell stock? ›

A lower cost basis means you'll recognize a bigger gain, and a higher cost basis means you'll recognize a loss or simply a smaller gain. That's something to consider as you think about your overall tax strategy.

Reinvesting dividends increases the cost basis of the holding because dividends are used to buy more shares. For example, let's say an investor bought 10 shares of ABC company for a total investment of $1,000 plus a $10 trading fee. The investor receives dividends of $200 in year one and $400 in year two.

The average cost method for determining cost basis is most commonly used for mutual funds. To calculate your basis, the average cost method takes the cost of all the shares you have purchased and divides it by the number of shares.

You can also call the company's shareholder services department for help. For shares purchased more than 10 years ago, go to a public library or law school library and look for back issues of newspapers, such as USA Today, to find the high and low price on the date of purchase.

Cost basis matters because it's the starting point for any calculation of a gain or loss. If you sell an investment for more than its cost basis, you'll have a capital gain. If you sell it for less, it's a loss. Calculating your cost basis is generally pretty straightforward, but there are exceptions.

Definition of Cost Basis

The calculation is simply the net amount received from the sale of shares less the cost basis of those shares. If the result is a positive number, then you have a taxable gain. If the figure is negative, then you have a loss.

In this case, you should refer to the original brokerage statement detailing the purchase of that security or contact your former broker to determine the Date Acquired and Cost Basis (what you paid for the security) and enter it manually into your tax preparation software or onto your Form 8949.

The cost basis reported on Form 1099-B reflects the purchase price only and doesn't account for income reported by your employer, due to IRS regulations. The Supplemental Information Form will show an adjusted cost basis that accounts for the income reported by your employer. file your taxes.