Now that the new year is upon us, I’m sure many are wondering about that important question, how to calculate your gain (or loss) on a sale of stock. Because stock shares are fungible (interchangeable), it is somewhat difficult to know how to pair the sales and buys. The following is what I’ve learned from my experience and should be used as a guide only. Go to a CPA to check and make sure the information is right and nothing has changed (if you are buying and selling stock, you need a CPA). This is not meant to be tax advice.
There are three ways to calculate the gain for a stock. You can pick any of these ways to calculate the gain, but once you start, you must use the same method for the whole position.
Average Price (Cost Basis): In this method, you use the average price you paid for the shares. Obviously just take the amount you paid for each transaction, sum them up, and divide by the total number of shares. Note this is the net amount paid – after you paid commissions to the broker.
First In- First Out: In this method, you assume the first shares you bought were the ones being sold. For example, if you bought 100 shares in January, 100 in March, and 100 in June, when you sell the first hundred shares you match them with the shares you bought in January. Once again you subtract what you bought the shares for from what you sold the shares for. Always use the cost after commissions. This is generally the worst way to sell shares because if you’ve done well, the price of the first shares you bought will be lower than the price of subsequent shares. If the first shares have been held long enough to be a long-term gain, while newer shares are a short-term gain, this is a good method.
Versus Purchase: The third method requires you plan things as you sell the shares. In this method, you tell your broker which shares you are selling, and he/she put in a “versus purchase” order. In that case you sell a specific set of shares and use the cost of those shares in the calculation. This is probably the best method of all since it allows you to sell the shares with the highest cost basis, minimizing your gains. It does take planning, however.
Once again, please use the above as a guide only and check with a professional. Also, if there are any professionals out there who see an error, please let me know.
Please send investment questions to vtsioriginal@yahoo.com or leave them in a comment.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Comments appreciated! What are your thoughts? Questions?