When tax time comes, you need to know the cost basis of stocks you sold so you can calculate capital gains and applicable taxes. If you purchased the same stock multiple times, it is tempting to calculate an average cost basis. However, according to the IRS, each purchase would have a separate cost basis, including taxable dividends that are reinvested to purchase additional shares. If a stock distributes nontaxable dividends as additional shares, then these shares would reduce your original cost basis. Dividends paid out in cash do not affect your cost basis.

## Cost Basis

Call your investment broker or reference your investment statements to find the number of shares you purchased and the original price. If you inherited the stocks, go to any financial website, such as Yahoo Finance, Google Finance or MSN Money, and look up the stock's closing price on the date of the original owner's death.

Multiply the number of shares by the original share price. As an example, if you purchased 100 shares at $20 per share, your total purchase price is $2,000. If you are calculating the cost basis for a dividend reinvestment, the total price would be the value of the dividends reinvested.

Add any broker or transaction fees to calculate your total cost basis. If the example sale incurred a $50 transaction fee, your total cost basis is $2,050.

Divide the total cost basis by the number of shares to calculate the per-share cost basis. Continuing with the example, each share would have a cost basis of $20.50.

## Nontaxable Dividend Distributions

Calculate the total cost basis as described in the previous section.

Add the number of nontaxable dividends you received to the number of shares you originally purchased. In the example, receiving five additional shares brings your total up to 105 shares.

Divide the total cost basis by your adjusted number of shares to calculate the per-share cost basis. Continuing with the example, your per-share cost basis is $19.52.

#### Tip

- When calculating capital gains, assume you are selling the shares starting with those acquired earliest. If you can document the specific group of stocks you sold, which is difficult when selling identical stocks, you may use that group's cost basis.

#### Warning

- The number of shares you purchased may need adjusting if the stock split. As an example, if the stock split two-for-one, then you receive two shares for each one you own. That means the 100 shares originally purchased amounts to 200 when calculating cost basis.