Part 3. Calculation of Cost Basis
You might think it's easy to figure out cost basis - your purchase price. However, it is important to adjust your cost basis for reinvested dividends, because you will pay tax on dividends that you reinvest as though you have pocketed the cash. But you won't be taxed twice - once when the dividend is paid to you and again when you sell - because your cost basis is adjusted upward by the amount of the dividend.
Investment expenses such as commissions will also increase your cost basis and reduce your taxes.
Brokerage firms usually keep records of all purchases and sales of securities for at least 6 years.
Next, we will discuss LIFO vs FIFO.