Adjusted Cost Base is the term that is used to describe the average cost of shares that an investor has bought. This is necessary so that you (and the government!) know how much tax you owe when you sell your shares. If you bought all of your shares at one time, there is nothing to it. If, however, you accumulated your shares through several separate purchases, you have some math in your future, in the form of the average cost method.
Doing the math
If you’re not thusly inclined, the mathematics of investing can quickly get ahead of you. While you (might!) argue that some calculations that investors routinely do are not absolutely necessary to tracking your investing progress, determining your adjusted cost base is not one of them; there is nothing the bit least optional about being able to determine how much you paid for your stocks. You need to know so you can calculate your taxes. Fortunately, it’s not that difficult. (The math part, not the paying taxes part; sorry, no help there.)
What you need to know
In order to determine your adjusted cost base, you’ll need to know what you paid for the shares each time you bought some, and how many shares you bought each time. You’ll also need to know how much you paid in commission each time.
1. Bought 100 shares January @ $10.00
2. Bought 150 shares March @ $9.50
3. Bought 200 shares June @ $12.00
For each transaction, you paid $10, for a total of $30.
Here’s the math:
100 X $10 = $1,000
150 X $9.5=$1,425
200 X $12=$2,400
3 X $10 Commission=$30
Total Cost = $4,855
The adjusted cost base is $4,855 ÷ 450 (the total number of shares) = $10.79.
This is actually the second number you need when determining how much tax you owe when you sell shares. Don’t worry, the first number is much easier; it is simply the price you sell the shares for. If you have decided to sell your shares because they have risen to $15, you simply subtract $10.79 from $15, leaving you with a net profit of $4.21 per share.
Note that the adjusted cost base is calculated the same way regardless of how many of your shares you’re selling. You simply need to multiply your per-share profit by the number of shares you’re selling to determine you capital gain. If you were to sell all of your shares, your capital gain would be $4.21 X 450=$1,894.50. If you only sell 200 of your shares, your capital gain would be $4.21 X 200=$842.
Is all this necessary?
Yes. And No. (But Yes is the better answer.)
It is necessary to know what your adjusted cost base is so you know how much tax to pay. That having been said, you don’t necessarily need to do the math yourself. My online brokerage keeps track for me, so I can see my adjusted cost base easily at any time. Frankly, I would find it hard to believe that all other online brokerages didn’t do likewise. This notwithstanding, I like to understand the math behind how and why my profits and taxes (the former more than the latter) are determined, and if you’re still reading, I assume you like to know, too. And now you do.