# How to determine the cost base of an equity investment

The cost base of any investment is the original value of an asset adjusted for stock splits, dividends and distributions of capital. It is used to calculate the capital gain or loss on an investment after its sale, for tax purposes.

Key points to remember

- Calculating the cost base of an investment shows the capital gain or loss on it and, therefore, the amount of tax that may be due.
- Various factors affect the base price of a share, including commissions, stock splits, capital distributions, and dividends.
- Several problems that arise when many investments in the same stock have been made over time and at different prices; if you can’t identify the exact stocks sold, you use the first in, first out (FIFO) method of accounting.

## What is the cost base?

At the most basic level, the base cost of an asset or security is the total amount invested in it, plus any commissions involved in the purchase. This can be described either in terms of the dollar amount of the investment or in terms of the effective price per share paid for the investment.

However, the actual calculation of the cost base can be complicated due to the many changes occurring in the market and security, such as stock splits and takeovers. For the sake of simplicity, we will not include commissions in the following examples, but this can be done by adding the commission amount to the investment amount ($ 10,000 + $ 100 commission = $ 10,100 base cost).

## Example cost base

Suppose you invested $ 10,000 in ABC Inc., which bought you 1,000 shares of the company. The base cost of investing is $ 10,000, but it is more often expressed in terms of base per share, so for this investment it would be $ 10 ($ 10,000 / 1,000). After a year, the stock’s value has risen to $ 15 per share and you decide to sell. Now you need to know your cost base to calculate the amount of tax you owe. In this case, it’s pretty simple: your investment went from $ 10,000 to $ 15,000, so you owe capital gains tax on the $ 5,000 ($ 15 – $ 10 x 1,000 shares ).

What is my cost base on an equity investment?

## How stock splits affect the cost base

If the company splits its shares, it will affect your cost base per share, but not the actual value of the initial investment or the current investment. Continuing with the example above, suppose the company issues a 2: 1 stock split, where one old stock earns you two new stocks. You can calculate your base cost per action in two ways:

- Take the amount of the original investment ($ 10,000) and divide it by the new number of shares you own (2,000 shares) to get the new cost per share base ($ 10,000 / 2,000 = 5 $).
- Take your previous cost per action base ($ 10) and divide it by the dividing factor of 2: 1 ($ 10.00 / 2 = $ 5).

## Sell shares of multiple investments

However, if the company’s stock price has fallen to $ 5 and you want to invest an additional $ 10,000 (2,000 shares) at that reduced price, it will change the total base cost of your investment in that company ( and will bring the total number of shares held to 3,000). Several problems arise when many investments have been made over time and at different prices. The Internal Revenue Service (IRS) says that if you can identify the stocks that were sold, their cost base can be used. For example, if you sell the original 1,000 shares, your base price is $ 10.

If you can’t do this identification, the IRS says you should use the first in, first out (FIFO) method. Therefore, if you were to sell 1,500 shares, the first 1,000 shares would be based on the oldest cost base of $ 10, followed by 500 shares on the most recent cost base of $ 5. That would leave you with 1,500 shares at a base price of $ 5 to sell at another time.

## Cost basis of shares offered or inherited

In the event that the shares were given to you as a gift, your base price is the base price of the original holder who gave you the gift. If the shares are trading at a lower price than when the shares were offered, the lower rate is the base price. If the shares were given to you as an inheritance, the base price of the shares to you as the heir is the current market price of the shares on the date of the death of the original owner.

There are many factors that will affect your cost base and possibly your taxes when you decide to sell. If your true cost base is unclear, please consult a financial advisor, accountant, or tax lawyer.

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