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The IRS has stipulated four methods for calculating cost basis. The choice of cost basis method can have a significant effect on the computation of capital gains and losses when shares are sold and, as a consequence, on one’s tax liability. 1. First In, First Out (FIFO) According to this method, as the name suggests, shares are sold in the order in which they were purchased, often leading to substantial taxable gains because the longer the shares are held in a rising market, the more they're worth. This is the method generally used, but it shows higher capital gains taxes and hence may not be the most advantageous as regards tax. 2. Single-Category Averaging This method calculates the average cost per share for each share owned. As in FIFO, this method sells oldest shares first and is not necessarily tax efficient. 3. Specific Shares This method is for meticulous investors who have kept careful and complete records of shares purchased by them. Depending on how long they have held the shares, they can ask the mutual fund to sell specific shares, preferably the ones they have paid the most for, since the smallest taxable gains would be earned. This method is hence more tax efficient but requires keeping of detailed records. One needs to remember, however, that gains are taxed at different rates depending on how long the shares have been held. 4. Double-Category Averaging In this method, shares are divided into those with short-term and those with long-term gains and are then averaged for stock cost basis. Different tax rates apply to each type. The investors will have to give the mutual fund written instructions how many shares from each category they want to sell. In order to calculate cost basis, therefore an investor will have to maintain a voluminous amount of records and statements relating to investments made, keep track of and account for corporate actions or events that alter the cost basis such as dividends, splits, etc. Each new action such as reinvestment of dividends, additional acquisition of a particular share already held or sale of any investment during the relevant period will necessitate the maintenance of a large amount of brokerage statements and confirmations as also recalculation of the cost basis. This is enough to give the average investor sleepless nights! For those with faint hearts it would be far more preferable to take the easy way out. Calculate Cost Basis for Securities in Seconds! Too good to be true? Up until now, calculating cost basis was a manual procedure that could take up days. Advances in computer technology have now turned the most frustrating and time-intensive calculations and reduced these to just a few seconds. All you need to do is enter a few bits of data in the relevant fields. One of the most popular software being used to accurately determine the adjusted cost basis for securities is Netbasis, is an award-winning and patented cloud base application that Networth Services has developed. This software is being used by government organizations, large corporate bodies, and commercial brokerages. Why spend days calculating the cost basis of securities when you can get the answer in a matter of seconds?
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