How to Calculate Cost Basis With Multiple Stock Purchases?

If you have ever bought or sold stocks, then you might have heard the term of ‘cost basis’. It’s a very essential part when you want to understand how much profit or loss you make at the time of selling your stocks. But it becomes more complicated to understand your cost basis when you have made multiple stock purchases of the same stock.

But don’t worry because we will cover some methods through which you can easily calculate your cost basis even with multiple stock purchases. We will also discuss how you can use the cost basis calculator to make the whole of your cost basis calculations easier. So keep reading!

1.1 What is Cost Basis in Stocks?

The cost basis of a stock is the total amount of money that you spend to purchase it. It includes the purchase price, commissions, and any fees which are related to the transaction. Knowing this cost basis is very important because when you want to sell your stocks, then the cost basis is the only thing that can tell you how much profit or loss you have made so far.

At the time of selling the stock, your cost basis is subtracted from the selling price to figure out what you have made, capital gain or loss.
For example, if you buy a stock for $1,000 and later sell it for $1,500, your cost basis is $1,000, and your capital gain is $500.

1.2 Why It Matters for Investors?

Cost basis is very important for a few reasons, such as:
Tax Implications: When you sell a stock, the cost basis helps you calculate how much tax you have to pay on the sale. If you sell the stock at a profit, you’ll have a capital gain. If you sell it at a loss, you’ll have a capital loss, which could reduce your tax liability.

Record-Keeping: If you keep an accurate record of your cost basis, it helps you to know the true value of your investments.
Investment Decisions: It can help you make more smart decisions about whether you should sell your stocks or hold them to get more gain.

2. Different Methods of Cost Basis Calculation

There are different methods available and the best and the most accurate one is using an online cost basis calculator which we’ll discuss along with other methods below so read till the end!

2.1 Average Cost Method

In this method, all the purchases of a particular stock are added together and then the average price per share is calculated. This is especially useful when you have to buy multiple stock purchases over time.

## How to Calculate Average Cost Per Share?

To calculate the average cost:
Add the total amount of money that you have spent on all the shares you bought.
After that, divide that total by the number of shares you own.

For example:
If you bought 100 shares for $1,000 and another 100 shares for $1,500, the average cost per share would be $2,500 ÷ 200 = $12.50.
Pros and Cons of this Method

Pros:
Simple and straightforward method.
It’s great for investors who want to make multiple purchases over time.

Cons:
Less flexibility in choosing which shares to sell for tax benefits.

2.2 Specific Identification Method

With this method, you can easily choose which shares to sell to get the maximum benefits. This is especially useful when you have purchased multiple shares at different prices over time. So that you can easily manage your capital gains or losses.

## How to Use This Method Effectively?

When using this method:
First of all, identify the specific shares and tell your broker or financial institution which specific shares you want to sell.
Then, use their purchase price as the cost basis.

For example:
If you bought shares at $10, $15, and $20, and now want to sell shares purchased at $20, your cost basis will be $20 for those shares.

Record-Keeping Requirements

To use this method, you just need to keep detailed records of every purchase, these details include:
Date of purchase.
Number of shares.

Purchase price of each batch.

2.3 First In, First Out (FIFO)

In this FIFO method, you sell the shares that you bought first, so the oldest shares in your collection are considered as they have to sell first. This way you can you can easily calculate the gains and losses based on the original purchase prices of the earlier shares.

Why Selling Old Shares First?
You may want to sell your older shares first because it can help you pay less in long-term capital gains taxes. It means older shares can sometimes be taxed at a lower rate than newer shares. So by using the FIFO method, you can take advantage of these lower rates, which means you can keep more of your profit when you sell your stocks.

When to Use FIFO?
When your older shares have a lower cost basis, and you want to maximize your gains (or take advantage of long-term capital gains tax rates).
When you want a simple method to calculate your gains or losses.

Advantages and Disadvantages

Advantages:
Simple and widely accepted by tax authorities.
It often results in larger capital gains, which could be beneficial if you want to minimize taxes in future years.

Disadvantages:
If your oldest shares were purchased at a lower price, you could face higher capital gains.

2.4 Last In, First Out (LIFO)

The LIFO method works in the opposite way of FIFO. In this method, you sell the shares first which you recently purchased.
Situations Where LIFO Might Be Useful
LIFO can be useful when you want to minimize the capital gain of the current year.
If the last shares you bought have a higher cost basis than earlier ones, selling them first reduces your taxable gains.

3. Steps to Calculate Cost Basis for Multiple Purchases by Using Cost Basis Calculator

3.1 Gather All Your Purchase Information

Before you use the online tool, first make sure you have all the necessary data for each stock that you have purchased, it includes:
Number of Shares: The number of shares purchased in each transaction.
Purchase Price Per Share: The price per share you paid for each purchase.
Commissions/Fees: Any additional charges (such as brokerage fees) paid during the purchase.

For example, let’s say you made the following purchases:
Purchase 1: 100 shares at $50 per share, with a $10 commission.
Purchase 2: 200 shares at $60 per share, with a $15 commission.
Purchase 3: 150 shares at $55 per share, with a $12 commission.
If you have all this necessary information ready in advance, it will make the calculating cost basis process much smoother.

3.2 Access the Cost Basis Calculator

Open your browser and search for the average cost basis calculator, and you’ll see a lot of websites that offer this tool for free. You can choose the one that looks best to you and gives accurate results such as calculator-online, inchcalculator, or costcalculator.

When you choose a website then look for the cost basis calculator. You’ll find this tool easily on the front of the homepage. Once you find the tool then click on it to open the tool.

3.3 Input Data Into the Calculator

Now, enter the details that we have discussed above into their relevant fields, and click on the ‘Calculate’ button.

3.4 Get Your Cost Basis

Once you click on the ‘Calculate’ button, the calculator will then process your inputs and give you the accurate cost basis, stock profit, and profit percentage in a few seconds.

FAQs
Can I switch cost-basis methods?
Yes, but you need to inform your broker and follow IRS rules if you decide to change your method.

Why is record-keeping so important?
It’s important because if you don’t have a proper record of each transaction. This could lead to incorrect results in your cost-basis calculations.