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jmkroll writes:

This cost basis thing confuses the heck out of me. Recently I sold 160 AOL at $135. These were part of a block of 500 I bought at $47. The stock has split 4 times(aint that great!) since then. What is my cost basis and what do i report as capital gains??

I reply:

There's a wrinkle I'll mention in a minute, but if I understand your question correctly, here's the basic calculation. (TMFTaxes, please correct me if I'm wrong.) I believe you mean that your stock has split 4-fold (rather than on four separate occasions) since you bought it. In that case, your 160 (new shares) of AOL are equivalent to 40 (old shares) of AOL at 4 times the price; here, $540. Thus, your gain on those shares is 40 (old shares) times ($540-$47) = (40)($493) = $19,720.

Here's the wrinkle. If you have bought AOL on more than one occasion, I believe you have more than one way to choose your basis the first time you sell AOL shares. One way is on a "first in, first out" basis, the other is by identifying specific shares. The catch is that to identify specific shares you need a contemporaneous writing from your broker confirming that you asked that specific shares be sold. There will surely be much more information on this subject in the Taxes FAQ area. --Bob
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