Average Cost of Shares Sold
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Average Cost of Shares Sold Margaret wrote......
I see averaging done regularly when people report their capital
gains and losses. What is your statement based on that only the actual is
appropriate?
My statement that "unlike investments in mutual
funds, the average cost of shares of stock may not be used when determining the
gain or loss upon sale. The actual cost of each block of stock sold must
be used to determine the gain or loss associated with the sale of each
block" was based upon the IRS code. While the IRS does
allow you to combine the reporting of the sale of multiple lots of the same
stock on Schedule D, the cost basis of those lots is not based upon the average
cost of your shares held. It is based purely upon the cost basis of
the specific shares sold.
With regard to Stocks and Bonds, IRS Publication #550 states "The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees.......The basis of stock must be adjusted for certain events that occur after purchase. For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. You must also reduce your basis when you receive nontaxable distributions, because these are a return of capital". When reporting the sale of your securities, Publication #550 goes
on to say..... "If you buy and sell securities at various times in varying
quantities and you cannot adequately identify the shares you sell, the basis of
the securities you sell is the basis of the securities you acquired first.
Except for certain mutual fund shares, discussed later, you cannot
use the average price per share to figure gain or loss on the sale of the
shares."
and "If you sell a block of stock or other property that
you bought at various times, report the short-term gain or loss from the sale on
one line in Part I of Schedule D and the long-term gain or loss on one line in
Part II. Write "Various" in column (b) for the "Date
acquired."
The result of this combination of lots of stocks on Schedule D and
the use of "Various" for the date acquired often causes people to perceive this
to mean that one is using the average cost of all shares held when reporting the
sale of shares purchased at various times. Here is an example of why that
isn't true. Let's say you purchased 3 blocks of the same
stock.
Block #1 - 100 shares of XYZ on 01/01/1998 at $12 a share ($1200
total)
Block #2 - 100 shares of XYZ on 05/15/1998 at $15 a share ($1500
total)
Block #3 - 100 shares of XYZ on 02/26/1999 at $24 a share ($2400
total)
The total cost of the 300 shares is $5100, resulting in an average
cost per share of $5100 / 300 = $17 per share.
On 04/15/2000 you decide to sell 200 shares of XYZ. Unless
you designate otherwise and follow the IRS guidelines of "adequate
identification", the shares sold are determined by First-in, First-out
(FIFO). Therefore, you sold blocks #1 and #2. As
noted above, the average cost of your XYZ holdings is $17/per share, however,
the cost basis that you must report for this sale is not $3400 (200 x
$17), it is $2700 ($1200 + $1500).
And finally, discussing Mutual Funds, IRS
Publication #550 states that "You can choose to use the average basis of mutual
fund stock if you acquired the stock at various times and prices and left it on
deposit in an account kept by a custodian or agent who acquires or redeems the
stock". Disclaimer: the statements above are opinions of the author and are
not official statements from either bivio or the IRS. These statements are not
intended to replace professional tax or accounting advice. When in doubt, follow
the advice of your local tax advisor or accountant who is familiar with your
particular circumstances.
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