The cost basis for your stock shares comes into play when you sell shares and need to calculate a profit or loss for your taxes. The tax rules do not allow the calculation of an average cost basis, so you need to keep track of what you paid for every share you have purchased.
Per Share Price at Time of Purchase
The basic cost basis of stock shares is the purchase price per share plus the per share amount of any commission paid to buy the share. For example, if you bought 100 shares at $20 per share and paid a $10 commission, your cost basis would be $20 plus 10 cents per share for the commission for a total of $20.10 per share. If you buy shares of the same stock at different times, you must keep track of the basis of each batch of shares by purchase date.
Adjustments to Basis
Several types of events require you to adjust the cost basis of shares you own. A stock split changes the basis inverse to the split ratio. So a 2-for-1 split cuts the cost basis per share in half. A 3-for-2 split reduces basis price by two-thirds. A merger or spin-off of a company in which you own shares changes the basis depending on how the terms of the deal affect the per share price of the stock for that company. You must also adjust the cost basis when you opt to automatically invest taxable distributions from a mutual fund or you will be paying twice. Inherited shares usually have a cost basis of the share price on the date the previous owner died. The executor of an estate has the option to designate an alternate valuation date six months after the date of death.
Basis for Sold Shares
The default share selection for basis calculation if you sell shares is first-in, first-out. The tax rules assume you sell your oldest shares first. There is an option to use the designated share method for cost basis, where you select specific shares by purchase date and cost for the basis determination. You need to notify your broker before the year-end Form 1099-B is issued if you want to use the designated shares option.