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I am completely new to this, so understand that I realize that I still have a lot to learn before I invest any significant sum of cash. I've bought a few shares of stock (let's call it ABC) through Scottrade to get a feel for it. I'm trying to understand how gains/losses are calculated on sell.

Assume this all happens in the same year, if it would be easier to explain. Given this scenario excluding commissions:

  • Bought 5 ABC @ $1/share -> order cost me $5
  • Bought 10 ABC @ $2/share -> order cost me $20
  • Sold 1 ABC @ $10/share -> I got $10

How are my capital gains calculated? It seems like it would depend on whether I sold 1 from the first 5, (gain of $9) or 1 from the second 10 (gain of $8).

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If you tell your broker which shares to sell, the answer is as you have stated; if you don't, it depends on which share the broker sells. But search for average cost basis for another version of the story if the shares you are describing are shares in a mutual fund. –  Dilip Sarwate Dec 24 '12 at 22:36
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1 Answer

up vote 4 down vote accepted

You specify how you want your transaction handled when you sell. I think most of online brokers have that option when you sell online.

Here is a definition of "Lot Relief Method" from Investopedia.com

Definition of 'Lot Relief Method' A method of computing the cost basis of an asset that is sold in a taxable transaction. There are five major lot relief methods that can be used for this purpose. They include FIFO (First-In-First-Out), LIFO (Last-In-First-Out), Dollar Value LIFO, Specific ID (a specific lot of securities or assets are chosen to use for the cost basis) and Average Cost (the average cost basis of all securities or assets purchased is used).

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Thanks for the confirmation. I recently opened an account with another online broker and their UI more naturally led me to the same understanding. –  Jason D Jan 8 '13 at 19:02
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