skip navigation

Search Help
Navigation Help

Topic Index
ABCDEFGHI
JKLMNOPQR
STUVWXYZ#

Affordable Care Act
Tax Topic Index

International
Tax Topic Index

FAQs
Forms
Publications
Tax Topics

Comments
About Tax Map

IRS.gov Website
Publication 550
taxmap/pubs/p550-022.htm#en_us_publink100010426

How To Figure
Gain or Loss(p45)

rule
You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property.
taxmap/pubs/p550-022.htm#en_us_publink100010427

Gain.(p45)

rule
If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.
taxmap/pubs/p550-022.htm#en_us_publink100010428

Loss.(p45)

rule
If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.
taxmap/pubs/p550-022.htm#en_us_publink100010429

Amount realized.(p45)

rule
The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). Amount realized includes the money you receive plus the fair market value of any property or services you receive.
If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. For more information, see Publication 537.
If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. See Regulations section 1.1001-1(g). However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized.
taxmap/pubs/p550-022.htm#en_us_publink100010430
Fair market value.(p45)
Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts.
taxmap/pubs/p550-022.htm#en_us_publink100010431

Example.(p45)

You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. Your gain is $3,000 ($10,000 – $7,000). If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000).
taxmap/pubs/p550-022.htm#en_us_publink100010432
Debt paid off.(p45)
A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. This is true even if neither you nor the buyer is personally liable for the debt. For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property.
taxmap/pubs/p550-022.htm#en_us_publink100010433

Example.(p45)

You sell stock that you had pledged as security for a bank loan of $8,000. Your basis in the stock is $6,000. The buyer pays off your bank loan and pays you $20,000 in cash. The amount realized is $28,000 ($20,000 + $8,000). Your gain is $22,000 ($28,000 – $6,000).
taxmap/pubs/p550-022.htm#en_us_publink100010434
Payment of cash.(p45)
If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. If the result is a positive number, it is a gain. If the result is a negative number, it is a loss.
taxmap/pubs/p550-022.htm#en_us_publink100010435

No gain or loss.(p45)

rule
You may have to use a basis for figuring gain that is different from the basis used for figuring loss. In this case, you may have neither a gain nor a loss. See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier.
taxmap/pubs/p550-022.htm#en_us_publink1000250005

Special Rules for Mutual Funds(p45)

rule
To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult. However, shares are generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. You can choose to use either a cost basis or an average basis to figure your gain or loss.
taxmap/pubs/p550-022.htm#en_us_publink1000250006

Cost Basis(p45)

rule
You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.
To figure cost basis, you can choose one of the following methods.
taxmap/pubs/p550-022.htm#en_us_publink1000250007

Specific share identification.(p46)

rule
If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure your gain or loss.
You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices and times, if you:
  1. Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and
  2. Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular shares sold or transferred.
You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.
taxmap/pubs/p550-022.htm#en_us_publink1000250008

First-in first-out (FIFO).(p46)

rule
If your shares were acquired at different times or at different prices and you cannot identify which shares you sold, use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely.
Table 4-2 illustrates the use of the FIFO method to figure the cost basis of shares sold, compared with the use of the average basis method (discussed next).
taxmap/pubs/p550-022.htm#en_us_publink1000250010

Average Basis(p46)

rule
You can figure your gain or loss using an average basis only if you acquired identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and you left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares.
Average basis is determined by averaging the basis of all shares of identical stock in an account regardless of how long you have held the stock. However, shares of stock in a dividend reinvestment plan are not identical to shares of stock with the same CUSIP number that are not in a dividend reinvestment plan. The basis of each share of identical stock in the account is the aggregate basis of all shares of that stock in the account divided by the aggregate number of shares.
taxmap/pubs/p550-022.htm#en_us_publink1000267598

Transition rule from double-category method.(p46)

rule
You may no longer use the double-category method for figuring your average basis. If you were using the double-category method for stock you acquired before April 1, 2011 and you sell, exchange or otherwise dispose of that stock on or after April 1, 2011, you must figure the average basis of this stock by averaging together all identical shares of stock in the account on April 1, 2011, regardless of the holding period.
taxmap/pubs/p550-022.htm#en_us_publink1000267599

Election of average basis method for covered securities.(p46)

rule
To make the election to use the average basis method for your covered securities, you must send written notice to the custodian or agent who keeps the account. The written notice can be made electronically. You must also notify your broker that you have made the election. Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949.
You can make the election to use the average basis method at any time. The election will be effective for sales or other dispositions of stocks that occur after you notify the custodian or agent of your election. Your election must identify each account with that custodian or agent and each stock in that account to which the election applies. The election can also indicate that it applies to all accounts with a custodian or agent, including accounts you later establish with the custodian or agent.
taxmap/pubs/p550-022.htm#en_us_publink1000267600

Election of average basis method for noncovered securities.(p46)

rule
For noncovered securities, you elect to use the average basis method on your income tax return for the first taxable year that the election applies. You make the election by showing on your return that you used the average basis method in reporting gain or loss on the sale or other disposition.
taxmap/pubs/p550-022.htm#en_us_publink1000267601

Revoking the average basis method election.(p46)

rule
You can revoke an election to use the average basis method for your covered securities by sending written notice to the custodian or agent holding the stock for which you want to revoke the election. The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election. The revocation applies to all the stock you hold in an account that is identical to the shares of stock for which you are revoking the election. After revoking your election, your basis in the shares of stock to which the revocation applies is the basis before averaging.
Tax Tip
You may be able to find the average basis of your shares from information provided by the fund.
taxmap/pubs/p550-022.htm#en_us_publink1000250013

Average basis method illustrated.(p46)

rule
Table 4-2 illustrates the average basis method of shares sold, compared with the use of the FIFO method to figure cost basis (discussed earlier).
Even though you include all unsold shares of identical stock in an account to compute average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first.
taxmap/pubs/p550-022.htm#en_us_publink1000250015

Example.(p46)

You bought 400 identical shares in the LJO Mutual Fund: 200 shares on May 9, 2012, and 200 shares on May 14, 2013. On November 14, 2013, you sold 300 shares. The basis of all 300 shares sold is the same, but you held 200 shares for more than 1 year, so your gain or loss on those shares is long term. You held 100 shares for 1 year or less, so your gain or loss on those shares is short term.
How to figure the basis of shares sold. To figure the basis of shares you sell, use the steps in the following worksheet.
1.Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $
2.Enter the total number of shares you owned in the fund just before the sale
3.Divide the amount on line 1 by the amount on line 2. This is your average basis per share $
4.Enter the number of shares you sold
5.Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold $
taxmap/pubs/p550-022.htm#en_us_publink1000250017

Example 1.(p46)

You bought 300 identical shares in the LJP Mutual Fund: 100 shares in 2009 for $1,000 ($10 per share); 100 shares in 2010 for $1,200 ($12 per share); and 100 shares in 2011 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 + $1,200 + $2,600). On May 8, 2013, you sold 150 shares. The basis of the shares you sold is $2,400 ($16 per share), figured as follows.
1.Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $4,800
2.Enter the total number of shares you owned in the fund just before the sale 300
3.Divide the amount on line 1 by the amount on line 2. This is your average basis per share $  16
4.Enter the number of shares you sold 150
5.Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold $2,400
taxmap/pubs/p550-022.htm#en_us_publink1000250019
Remaining shares.(p46)
The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis of the shares sold. The next time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made a subsequent adjustment to basis).
taxmap/pubs/p550-022.htm#en_us_publink1000250020

Example 2.(p46)

The facts are the same as in Example 1, except that you sold an additional 50 shares on December 9, 2013. You do not need to recompute the average basis of the 150 shares you owned at that time because you acquired or sold no shares, and had no other adjustments to basis, since the last sale. Your basis is the $16 per share figured earlier.
taxmap/pubs/p550-022.htm#en_us_publink1000250022

Example 3.(p47)

The facts are the same as in Example 1, except that you bought an additional 150 identical shares at $14 a share on September 9, 2013, and then sold 50 shares on December 9, 2013. The total adjusted basis of all the shares you owned just before the sale is $4,500, figured as follows.
1.Basis of remaining shares ($16 x 150) $2,400
2.Cost of shares acquired 9/9/2013 ($14 x 150)$2,100
3.Total adjusted basis of all shares owned ($2,400 + $2,100)$4,500
   
The basis of the shares sold is $750 ($15 a share), figured as follows.
1.Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $4,500
2.Enter the total number of shares you owned in the fund just before the sale 300
3.Divide the amount on line 1 by the amount on line 2. This is your average basis per share $  15
4.Enter the number of shares you sold 50
5.Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold $ 750
taxmap/pubs/p550-022.htm#en_us_publink1000250029
Shares received as gift.(p47)
If your account includes shares that you received by gift, and the fair market value of the shares at the time of the gift was not more than the donor's basis, special rules apply. You cannot choose to use the average basis for the account unless you state in writing that you will treat the basis of the gift shares as the FMV at the time you acquire the shares. You must provide this written statement when you make the election to use the average basis method, as described under Election of average basis method for covered securities and Election for average basis method for noncovered securities, earlier, or when you transfer the gift shares to an account for which you have made the average basis method election, whichever is later. The statement must be effective for any gift shares identical to the gift shares to which the average basis method election applies that you acquire at any time and must remain in effect as long as the election remains in effect.
taxmap/pubs/p550-022.htm#en_us_publink1000250030

Table 4-2. Example of How To Figure Basis of Shares Sold

This is an example showing two different ways to figure basis. It compares the cost basis using the FIFO method with the average basis method.
DateActionShare PriceNo. of SharesTotal Shares Owned
2/8/2011Invest $4,000$25160160
8/9/2011Invest $4,800$20240400
12/13/2011Reinvest $300 dividend$3010410
10/1/2013Sell 210 shares for $6,720$32210200
 
COST BASIS
(FIFO)
To figure the basis of the 210 shares sold on 10/1/2013, use the share price of the first 210 shares you bought, namely the 160 shares you purchased on 2/8/2011 and 50 of those purchased on 8/9/2011.
 
  $4,000 (cost of 160 shares on 2/8/2011)
 +$1,000 (cost of 50 shares on 8/9/2011)
 Basis =$5,000
 
AVERAGE BASISTo figure the basis of the 210 shares sold on 10/1/2013, use the average basis of all 410 shares owned on 10/1/2013.
  $9,100 (cost of 410 shares)
  ÷ 410 (number of shares)
  $22.20 (average basis per share)
 
  $22.20 
  × 210
 Basis =$4,662
Where Refund
When there is a sale, exchange, or redemption of your shares in a fund, keep the confirmation statement you receive. The statement shows the price you received for the shares and other information you need to report gain or loss on your return.