It's a tax issue. The IRS is really interested in how many gains or losses you make on your mutual funds, stock purchases and other investments because they want to be sure to tax you on your gains. The average cost basis is one way to arrive at an answer.
Basically, you tally up everything and divide by the number of shares to get the number. Example: You liked AT&T at $40 a share. You bought 500 shares. You liked it even more at $35 and bought 1,000 shares. You loved it at $30 and bought 2,000 shares. You adored it at $25 and bought 5,000 shares. Add up the total shares you purchased and figure out the total you paid for everything. Then divide the amount you paid by the shares you have. That gives you an average cost basis is $28.24 (forget commissions).
The stock then went to $50 and you sold half your holdings, or 4,250 shares. How much gain was there? Well, you take the average cost in for half of your shares, and you match it with the average cost out. In this case, you are realizing gains per share of $50 - $28.24 or $21.76 x 4,250 shares or $92,480.
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Finance: What is Tax Basis?8 Views
Finance allah shmoop What is tax basis Well your basis
is your cost Your costs for assessing how much you
owe when the tax man coming you bought a thousand
shares of whatever dot com at twelve bucks a share
in its eye po and huzzah Three years later the
stock is at thirty You decide whatever dot com is
now passe because a kardashians said so it'll be over
taken by whenever dot com and you want to sell
So you dio and you live in a thirty percent
marginal tax blue state And that is your federal tax
rates in twenty percent But then you add in ten
percent for state taxes and whatever's left for obamacare and
you pay about thirty percent tax on your gains Well
you paid twelve grand to buy the stock and after
the sale you took in thirty grand when you sold
it for a gain of eighteen thousand dollars Your tax
basis on those shares is twelve grand so you pay
thirty percent tax on the eighteen grand of gain or
fifty four hundred dollars to net from the sale of
thirty thousand dollars worth of stock How much Yeah twenty
Four thousand six hundred dollars He fancy math Had you
just gotten those shares free I'ii they were gifted to
you and you had no tax basis or a tax
basis of zero dollars a share Well then your gain
would have been from zero to thirty grand or a
gain of thirty thousand dollars to then be taxed at
thirty percent or nine grand in taxes to net just
twenty one thousand dollars after the sale So having ah
high tax basis or at least being able teo point
toe one saves you money when the tax man coming
and well that's pretty much it alright he's gone Now
you can all come out Come on it's Okay it's 00:01:53.698 --> [endTime] safe
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