What is the best cost basis method for stocks?
James Williams
Updated on March 12, 2026
Choosing the best cost basis method depends on your specific financial situation and needs. If you have modest holdings and don’t want to keep close track of when you bought and sold shares, using the average cost method with mutual fund sales and the FIFO method for your other investments is probably fine.
Do reinvested dividends add to cost basis?
Reinvesting dividends increases the cost basis of the holding because dividends are used to buy more shares. In other words, when selling an investment, investors pay taxes on the capital gains based on the selling price and the cost basis.
Does selling puts lower cost basis?
Instead of buying stock at its current market price (for its full cost basis) you can sell an out of the money put. Selling the put will also give you a credit, to lower your cost basis even further than the chosen strike price. Let’s say that you were considering buying stock in Twitter ($TWTR).
How is the cost basis of a stock determined?
Calculating the cost basis of an investment indicates the capital gain or loss on it—and thus, how much tax may be owed. A variety of factors affect the cost basis of a stock, including commissions, stock splits, capital distributions, and dividends.
When do you need to adjust your cost basis?
If the stock splits, and you sell less than 100% of your shares of a stock, you’ll need to adjust your cost basis for the split so you can correctly calculate your cost basis. The same is true if the stock has a reverse split. You need to lower your cost basis for tax benefits you receive.
When to adjust your cost basis for a stock split?
If the stock splits, and you sell less than 100% of your shares of a stock, you’ll need to adjust your cost basis for the split so you can correctly calculate your cost basis. The same is true if the stock has a reverse split.
Do you have to tell your broker about your cost basis?
The IRS requires you to assume that you sold your oldest stocks, which unfortunately might be the ones with the lowest cost basis. This may not be the best tax result for you. If you’d rather sell other stocks from a particular company, you must tell your broker ahead of time.
