Cost basis is how much you paid for shares of a security The average cost basis method is an IRS-approved way to determine the average price that you paid for mutual fund shares only, not individual securities. In its Cost Basis Reporting FAQs, the IRS lays out what information brokerages and other financial institutions must provide with respect to cost-basis … This can be handy when averaging in on a stock purchase or determining your cost basis.For more information on cost basis check out this investopedia article. Under federal tax law, you have to pay taxes on realized gains in the value of assets that you sell, including mutual funds, stocks and securities. So 100 shares bought at an NAV of $10/share ($1,000 + 5%($1,000)) would have a $1,050 cost basis with a basis of $10.50/share. Assuming that asset prices rise over time, this means that you pay more taxes on selling these shares then you would if you were to sell your last bought shares first.You can opt to report your asset sales using the average-cost-method, in which case you add up the total value of all of your shares and divide the total premium spent between the number of shares that you own. Therefore, you can apply the average-cost-method to both your long-term and short-term gains, and the IRS refers to this tax reporting method as the average-cost-double-category. It may not be used to figure the cost basis when selling individual bonds and stocks. If you want to use average cost basis or one of the other cost basis methods, contact the broker, mutual fund or transfer agent to let them know what cost method you will use to report capital gains. Note that only mutual fund and compliant stock dividend reinvestment plan investments can use the average cost basis method to determine cost basis when reporting capital gains.Starting on January 1, 2011 for stocks and January 1, 2012 for mutual funds and stock dividend reinvestment plans, the broker or transfer agent that issues a Form 1099 for sold shares is required to include cost basis information on the 1099. This way your cost basis will match the cost basis information received by the IRS.Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. You then have the same cost basis for every share regardless of the actual purchase price. The weighted average cost (WAC) method of inventory valuation uses a weighted average to determine the amount that goes into COGS and inventory. Individual dividend reinvestment plans must meet certain Internal Revenue Service compliance requirements to use the average cost basis method. Your cost basis is what you paid when the investment was made. For many years, the average cost basis method could only be used with mutual fund investments. You pay taxes only on the gains, which are your selling price minus the cost basis. When you sell some of the shares, unless you specify otherwise, the Internal Revenue Service assumes that the assets that you sell first are also the one's that you bought first. The amount of tax that you pay depends on how you report you earnings. Brokerage firm responsibilities. Using the average cost, cost basis is calculated based on the average price paid for all shares held, regardless of holding period. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more.At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.