Series 7: 6.1.7.5. Figuring Capital Gains On Shares Sold At A Profit

6.1.7.5. Figuring Capital Gains on Shares Sold at a Profit

When an investor sells shares, the investor must figure the amount of the gain for tax purposes. The amount of the gain is the difference between the price at which the shares were sold and the cost basis of the shares. The cost basis is the amount that has been spent on an investment, including commissions and fees, and taxed already. Finding the cost basis can often be complicated because mutual fund shares are often bought at different times and at different prices. For the exam, you may need to know three of the methods that the IRS accepts for figuring cost basis.

1. First in, first out (FIFO). The shares bought earliest are assumed to be the shares that are sold. This is the most conservative method and usually results in the highest capital gain because shares usually appreciate over time. If the investor doesn’t specify which method she will use, the IRS will assume the FIFO method was used.

2. Average cost. The ave