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The Basics of Cost Basis

Anytime you’re looking to sell an investment, your gain or loss will be determined by calculating the difference between the cost basis—your purchase price plus trading costs and/or commissions—and the current market price. But when you’ve purchased the same investment several times over the years, you’re likely to have a different cost basis for each transaction—and which shares you decide to sell can affect not only your profit or loss but also any taxes you might owe.

When instructing your brokerage firm which shares to sell, you can choose from one of several methods for calculating your cost basis:

  • First in, first out (FIFO) means your shares will be sold from oldest to newest.
  • Last in, first out (LIFO) means your shares will be sold from newest to oldest.
  • High cost means your shares will be sold from highest cost basis to lowest cost basis.
  • Low cost means your shares will be sold from lowest cost basis to highest cost basis.
  • Specific identification means your shares will be sold however you see fit.

So, which method is right for you? “Unless you specify otherwise, at Schwab the default method for everything except mutual funds is FIFO,” says Hayden Adams, CPA, CFP®, director of tax and financial planning at the Schwab Center for Financial Research. (For more on mutual funds at Schwab, see “What about mutual funds?” below.) “However, in many cases you’d be better served using specific identification, which allows you to sell particular shares and therefore gives you the greatest control over your tax bill” (see “Case in point,” below).

“It’s really just a matter of ensuring that whatever method you go with is in line with your specific goals for the sale,” Hayden says. When in doubt, discuss your options with a qualified tax advisor before taking action.

 

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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