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The basics of calculating cost basis

 

 
 
 
 
 

What is cost basis?

Your cost basis is generally the price you paid for your shares, adjusted for reinvested dividends and capital gains distributions, as well as any sales charges or transaction fees.

Cost basis is an important calculation used to determine gains and losses on any shares you sell in a taxable (nonretirement) account. You’ll need this information to prepare your income tax return.

Cost basis is not a measure of performance. If you want to gauge the performance of your investments, log on to your account at vanguard.com and select Performance under My Portfolio.

How do I calculate cost basis?

Suppose you bought shares at $20 and $50, then sold them at $100 per share. The shares with the higher cost basis would produce a smaller taxable gain when sold ($100-50=$50) than the shares with a lower cost basis ($100-20=$80).

Why do I have to calculate cost basis?

The IRS requires you to report your gains or losses on Form 1040, Schedule D when you sell shares. Keeping track of your cost basis is an integral part of calculating your capital gain or loss.

Among the options for calculating cost basis are:

  • Average cost (AvgCost). Calculates the average cost per share for each share you own.
  • First in, first out (FIFO). Shares with the oldest purchase date will be sold first.
  • Specific identification (SpecID). You choose the shares (or lots) to sell, which will determine your capital gain or loss.

To find out more about the services Vanguard provides, see our cost basis accounting service page.

More changes are on the way

New regulations require Vanguard to report cost basis information to the IRS on Form 1099B when you buy and sell shares according to the table below. We’ll continue to report this information to you as well. To assist you with these new reporting requirements, we'll offer an enhanced cost basis service so you can choose a method suited to your financial situation. This will include the ability to identify specific shares.

The new IRS regulations take effect for different securities as shown below.

January 1, 2011 January 1, 2012 January 1, 2013 or later
Stocks Vanguard mutual funds Bonds
ETFs not registered under the Investment Company Act of 1940*
ETFs registered under the Investment Company Act of 1940* (includes all Vanguard ETFs)
Options
  Dividend reinvestment plans Other securities

* If you're not sure that your ETF is registered under the Investment Company Act of 1940, check with your ETF issuer. All Vanguard ETFs are registered under this act.

Note: All investments are subject to risk. Consider consulting a tax advisor for guidance regarding your specific situation.

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