| Average Cost Single Category Method |
The Average Cost Single Category
method is one of the most commonly
used ones for mutual fund holdings
with many tax lots. It is the one that
most mutual fund companies use as
the default method because it is easy
to display a single number on your
account statement.
It cannot be used if you have any
shares in physical certificate form.
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In the past, you had to inform the IRS about your election the first time you used this
method, or they assumed you were using FIFO (First In First Out). You can now
change to another method without seeking IRS approval.
You can only use this method for mutual funds and dividend reinvestment accounts,
not for directly-held stocks or bonds.
This method simplifies the accounting a lot by putting all the costs in one bucket.
You still have to identify the holding period of the shares that were sold, however,
with long-term shares sold first.
To apply this method, every time you have a dividend reinvestment, you just add the
dividend dollar amount to your cumulative cost total and add the number of shares
reinvested to your cumulative total shares. Divide the cumulative cost by the
cumulative shares for your new average cost per share.
If you sell any shares, subtract the number of shares sold from your cumulative share
total and subtract the product of the average cost times the number of shares sold
from the cumulative cost total. To check the accuracy of your math, the remaining
cumulative cost divided by the remaining cumulative shares should equal the same
average cost per share as it was before the sale.
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Here is an Excel worksheet that you
can download and use to compute your
mutual fund cost basis under the
average cost single category method.
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Average Cost Single Category |
If you do not have access to an Excel spreadsheet program, you can copy the column headings below to a sheet of vertically-lined accounting paper and make the calculations manually.
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Column Description Calculation
A Purchase Date
B Number of shares in this purchase
C Total Number of shares cumulative Col B from current line
plus Col I from previous line
D Cost of this purchase
E Total Cumulative Cost Col D from current line
plus Col J from previous line
F Average Cost Basis per Share Col E divided by Col C
G Number of shares sold
H Cost basis of shares sold Col G divided by Col C times Col E
I Number of shares remaining Col C minus Col G
J Total cost basis remaining Col E minus Col H
K Sales proceeds
L Gain or loss on sale Col K minus Col H
M Date of sale
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Here is a blank template in Adobe "pdf" format to print out. It has the headings already inserted for you to use.
Here is a link to download the free Adobe Reader if you do not already have it installed on your computer. You may need to download the latest version for documents to open.
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Letter Size Blank Worksheet |
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| Download Adobe Reader |
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Account Maintenance Fees and Service Charges
Another question that often arises is what to do with those pesky account maintenance fees and service charges when they sell shares from your account to pay the fee. The actual sale event generates a gain or loss for the number of shares sold. The fee expense payment is an investment expense (limited to the amount of your investment income) that can be claimed as a miscellaneous itemized deduction (subject to an overall floor of 2% of your adjusted gross income.) Generally, the mutual fund sponsors do not include account maintenance fees in the average cost basis calculation.
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