Cost basis is how much you paid for shares of a security The average cost basis method is an IRS-approved way to determine the average price that you paid for mutual fund shares only, not individual securities.
With the average cost-single category (ACSC) method, you calculate the cost basis based on the average price paid for all shares, regardless of how long you owned them. With the average cost-double category (ACDC) method, you determine two cost bases: a short-term one for shares owned less than one year and a long-term one for shares owned more than one year.
Calculating Average Cost Basis
To use ACSC, go through your mutual fund statements and add up the total amount that you paid for your mutual fund shares. This includes dividends that were reinvested to buy additional shares.
Divide the total amount paid by the number of shares owned and you have the average cost basis.
If you want to use ACDC instead of ACSC, determine how many shares you have owned for less than a year and how many shares you owned for a year or longer. Determine the amount paid for each. Divide the amount paid by the number of shares.
The ACSC method is most frequently used.
Most mutual funds track the cost basis for you on your statements.
If you use the average cost method for a particular fund, you can't change to another method unless you get the OK from the IRS.