Average cost basis is the average price you paid per share when you bought the same stock or ETF at different times and different prices. Instead of tracking each purchase separately, you combine them into one number: the total amount you spent divided by the total number of shares you own. It’s the figure most investors use to work out gain or loss, and it’s often what shows up on tax forms when you sell.
Here’s a simple example: you buy 10 shares at $40 and later another 10 shares at $60. You’ve spent $1,000 for 20 shares, so your average cost basis is $50 per share, even though you never actually paid exactly $50 for any single share.
If the stock is trading at $70 when you sell, your gain is calculated against that $50 average, not against either of the original purchase prices.
One thing worth knowing: average cost basis is a simplification. If you sell only part of a position, some brokers let you choose a different accounting method, like FIFO (first in, first out) or specific-lot identification, which can change your taxable gain. Always check your brokerage statement for the method actually used before relying on it at tax time.
Want to work out your own average cost basis? Try our Average Cost Basis Calculator to see the number instantly.
Official Tax Guidance
The IRS notes that average basis may be available only in certain circumstances and that identification rules can affect the basis of shares sold. See the IRS FAQ on stocks and average basis. This article explains the arithmetic concept and is not individualized tax advice.