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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121185  
Subject: Re: Cost Basis Date: 9/16/1998 11:37 PM
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[[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??]]

As Joe and Bob pointed out, the basis computations for stock splits are really pretty easy. But I read the question a bit different than either Joe or Bob. I'm reading your statement as if AOL split on four separate occasions (I could be very, very wrong, but it at least allows me to provide a more comprehensive example). If that is not the case, and you did NOT purchase those original 500 shares all at the same time, your computations are a bit more complicated. But we'll talk about that a little later.

But you have not provided enought information for me to really answer the question with any degree of certainty. Without a clarification on the stock split issue, I would hesitate to give an answer that applies to your situation. Even though I generally agree with the theory laid out by Joe and Bob, my computations come up very, very different. Why? Because a base number of 500 shares that "split" four times does not equal 2,000 shares.

Watch...(and this will assume only 2:1 splits each time)

If I buy 500 shares, I have 500 shares (Duhhh)

On Split #1, my 500 shares turn into 1,000 shares.

On split #2, my 1,000 shares turn into 2,000 shares.

On split #3, my 2,000 shares turn into 4,000 shares.

And, finally, on split #4, my 4,000 shares turn into 8,000 shares

So while Bob and Joe were using a split adjusted number of shares of 4,000, I come up with 8,000 total shares that you should now have.

But let's ignore the math and focus on the theory of the issue. As Joe and Bob both pointed out, you are required to spread your original basis over the total shares of stock that you now own.

Your original basis was 500 shares at $47, for a total basis of $23,500 (as Joe pointed out, you must remember to add your broker purchase commissions and costs to this total basis. But for the purposes of our example, lets ignore the impact of commissions).

You are now required to spread your original basis over your total number of shares of stock. In the example above, you would now have 8,000 shares of AOL, at a total basis of $23,500. This means that your PER SHARE basis would amount to about $2.94/share (your original cost basis of $23,500 divided by your total number of shares of 8,000).

If you sell the shares for $135/share, you would have a gain of about $132.06/share ($135/share less your cost basis of $2.94/share), for a total gain of about $21,129.60.

So, obviously, we can't really answer YOUR question until the split issue is cleared up. But the theory remains the same regardless of the number of shares: you are REQUIRED to spread your original basis over your total number of shares to arrive at a new per share price.

Finally, as Bob pointed out, if you really bought these 500 shares at different periods of time, you'll really want to make different "spread" computations for each different "block" that you pruchased. Why? Becuase you now may have the option to "specify" which block of shares that you sold, and may be able to control your gain.

For additional information on "specifying shares", see my post on that very issue in the Taxes FAQ area. For additional information, KAT in Chicagoland has a good write up on the "specification" issue in his web site (http://www.fairmark.com).

Hope this helps. And don't be afraid to come back and provide us with a few more specifics regarding the total number of shares that you originally bought, and the total number that you had before the sell off if you would like some additional information.

TMF Taxes
Roy

SPECIAL NOTE: Remember that this response is not the "last word" on your situation. It is really only a starting point. Make sure to review the "Read This First" post
(http://www.fool.com/School/Taxes/TaxesDisclaimer.htm) for additional information. In addition, many of your questions may already be referenced in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's Money area (http://www.fool.com/money.htm) and check out "Tax FAQs" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov).
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