can i use average cost basis for stocks

Can I Use Average Cost Basis for Stocks

can i use average cost basis for stocks — short answer up front: for most ordinary individual stocks bought on the open market, the IRS generally does not permit using an average cost per share when reporting gains or losses; however, average cost is commonly permitted for mutual funds and many ETFs and is sometimes allowed for shares acquired through dividend reinvestment plans (DRIPs). This guide explains what average cost basis means, how it differs from FIFO and specific identification, what the IRS requires for covered and noncovered securities, and practical steps you can take with your broker (including Bitget) to choose or change a cost‑basis method.

Summary Answer (Lead)

In short: can i use average cost basis for stocks? Not normally. For individual equities traded on exchanges, the IRS expects FIFO (first‑in, first‑out) by default unless you properly use specific identification at the time of sale. Average cost per share is explicitly allowed by the IRS for mutual funds and many ETFs and is the common broker default for funds and DRIPs. Brokers are required to report basis for “covered” securities on Form 1099‑B for most customers; the rules and phase‑in dates differ by security type.

What “Average Cost Basis” Means

Average cost basis (often called “average basis”) takes the total cost paid for all shares of a single holding and divides that sum by the total number of shares to produce one per‑share cost. When you sell, your gain or loss is computed by subtracting that single average cost per share (multiplied by shares sold) from your sale proceeds.

Calculation example (simple):

• Buy 100 shares at $10 = $1,000
• Buy 50 shares at $15 = $750
• Total cost = $1,750; total shares = 150
• Average cost per share = $1,750 ÷ 150 = $11.667
• Sell 50 shares at $20 → Gain = (50 × $20) − (50 × $11.667) = $416.65

Average cost automatically aggregates reinvested dividends (in DRIPs or automatic dividend reinvestment) into the pooled cost. Contrast this with FIFO, LIFO, and specific identification:

• FIFO (first‑in, first‑out): the earliest acquired shares are treated as sold first. Common default if you can’t identify lots.
• LIFO (last‑in, first‑out): rarely used for brokered equities and generally not the IRS default for stock sales.
• Specific identification: you identify which exact lots (purchase dates and quantities) are being sold at or before the trade—this lets you realize particular gains or losses and manage holding periods.

IRS Rules and “Covered” Securities

The IRS distinguishes between covered and noncovered securities for broker reporting purposes. Covered securities are those for which brokers must report cost basis and certain acquisition dates to the IRS on Form 1099‑B when the shares are sold. The phase‑in timeline matters:

• Equity securities (individual stocks) became covered for broker reporting beginning with purchases on or after January 1, 2011.
• Mutual fund shares and shares acquired through dividend reinvestment plans (DRIPs) became covered beginning January 1, 2012.
• Certain other types of securities and exchange‑traded funds were phased in later under expanded rules.

Because brokers must report basis for covered lots, the broker will typically track the basis method you elect for covered holdings and include basis and acquisition date information on Form 1099‑B. For noncovered shares (for example, stock lots acquired before the broker’s covered start date), you may be responsible for maintaining and reporting your own basis if the broker cannot supply it.

Where the Rules Come From (Official Guidance)

The governing IRS sources include Publication 551 (Basis of Assets), the instructions for Form 1099‑B and Schedule D, and IRS FAQs on cost basis. These sources explain acceptable cost‑basis methods, lot identification requirements, how reinvested dividends are treated, and the broker reporting obligations. The legal interpretation and administrative guidance make clear that average basis is not permitted for most individual stocks sold in the open market, while average basis is acceptable for mutual funds and certain DRIP shares.

As of 2026‑01‑14, according to IRS notices and brokerage cost‑basis guidance, the covered‑security rules remain the foundation for how brokers compute and report basis on behalf of investors; taxpayers must reconcile broker reporting with their tax returns and may need to provide additional documentation when using specific identification.

Cost‑Basis Methods Allowed for Stocks

For ordinary individual stocks, the allowed methods and practical defaults are:

• Specific identification: Taxpayer must notify the broker at or before the trade which lot(s) to sell. This method gives maximum control and allows choosing lots to optimize tax outcomes (long‑term gains vs short‑term, harvesting losses, etc.).
• FIFO (first‑in, first‑out): If you do not specify, brokers will typically use FIFO to determine which particular shares are sold. The IRS and broker systems default to FIFO when no valid specific identification is provided.
• Average cost basis: Generally not allowed for individual stocks that trade on exchanges and are not mutual fund shares or DRIP lots. Brokers will not accept an average basis election for ordinary stock lots except in very limited circumstances tied to DRIPs or pooled fund structures.

Because can i use average cost basis for stocks is a common tax question, remember: the IRS explicitly limits average basis use in the equity context to certain fund/DRIP cases; ordinary shares traded in brokerage accounts normally require lot‑level methods.

Specific Identification — Requirements & How to Do It

Specific identification is powerful but must be done correctly:

• You must tell your broker exactly which lots you are selling before the trade executes or as required by the broker’s procedures (many brokers accept instructions when you place the sell order online or via trade ticket).
• Your instruction must include enough detail for the broker to identify the lots—typically the trade dates and quantities (e.g., “sell 100 shares from lot bought 03/15/2019”).
• Keep confirmations and trade tickets that document the lot selection. Brokers usually require the instruction be recorded in the account; if not, the broker may default to FIFO.
• If you cannot adequately identify the lots (no valid documentation or missed timing), the broker and IRS will usually apply FIFO and you lose the lot‑level tax planning benefit.

Practical tip: before placing a sell order intended to use specific ID, verify the broker’s process—some require a written or electronic election on file for specific identification to apply as an account setting.

Average Cost Basis for Mutual Funds, ETFs, and DRIPs

Average cost basis is commonly allowed and widely used for mutual fund shares and, in many cases, ETFs—especially where the broker or fund sponsor pools shares or where frequent automatic reinvestments make lot tracking cumbersome. Many mutual fund companies and brokers default to average cost because it simplifies long histories of fractional shares from reinvested dividends and frequent purchases.

Key points:

• When average cost is permitted, the broker or fund calculates a single average for all shares in the account (or for a particular fund position) and uses that to compute gains/losses on sales.
• This single number includes the cost of reinvested dividends (they are treated as purchases), so average basis automates handling of DRIP reinvestments.
• Brokers often let you elect average cost at the account or holding level; once elected, elections may govern how covered shares are reported and may only apply prospectively for newly acquired covered shares.

Because the phrase can i use average cost basis for stocks appears in many investor searches, note that while ETFs often behave like stocks in trading, many brokers nevertheless permit average cost for fund‑style holdings—confirm with your broker whether the ETF in question is pooled for average cost purposes.

Broker Practices and Election Rules

Brokers implement average cost in a few common ways:

• Default to average cost: For mutual funds and DRIPs, many brokers default to average cost when you enroll in dividend reinvestment or hold funds in an account.
• Account election: You may need to elect average cost in writing or via the broker’s account settings. The broker’s cost‑basis FAQ will explain whether the election is retroactive for noncovered shares or only prospective for covered shares.
• Changing methods: Switching from average cost to another method or vice versa often requires an election and may be limited in how it applies to covered vs noncovered holdings. Brokers usually do not allow retroactive changes that would alter previously reported Form 1099‑B data to the IRS without significant documentation.

Always check your broker’s cost‑basis help pages (for example, the broker’s average cost basis FAQ) and request written confirmation of any election.

Dividend Reinvestment Plans (DRIPs) and Exceptions

DRIPs complicate basis tracking because reinvested dividends create frequent fractional‑share purchases. Historically, fund companies and brokers treated DRIP reinvestments in ways that made pooled or average basis convenient. The IRS made DRIP and mutual fund shares subject to the covered‑security reporting regime starting in 2012, so many DRIP lots acquired after that date are “covered” and get basis reported by brokers.

When shares are in a DRIP, average cost is often permitted for the pooled lots created by reinvestment. However, the specifics vary by broker and by whether the shares are covered. If you rely on average basis for DRIP shares, confirm how the broker treats covered lots and whether the election applies to those shares prospectively.

Practical Tax Implications & Examples

Example 1 — Average cost vs FIFO for a fund with reinvestments:

• You buy 50 fund shares at $20 and later reinvest dividends to buy 10 more shares at varying prices. Total cost becomes $1,150 for 60 shares → average cost = $19.17. Selling 20 shares at $25 using average cost yields a gain of (20 × $25) − (20 × $19.17) = $166.60.
• If FIFO applied and the 20 shares sold were from low‑cost early lots, reported gain/loss could be different—specific ID lets you control which lots are sold to optimize taxes.

Example 2 — Individual stock where average cost is not allowed:

• You acquired stock X in three lots at $10, $15, and $30. Average cost would be $18.33, but for this listed stock you cannot use average cost. If you don’t specify a lot at sale, the broker will default to FIFO, possibly realizing a different gain or loss than average basis would have produced.

Reinvested dividends increase your basis: each reinvestment is treated as a purchase at the reinvestment price and becomes part of the total basis used in average cost or lot‑level tracking.

Recordkeeping, Form 1099‑B, and Reporting Considerations

Good recordkeeping matters. Brokers will provide Form 1099‑B showing sales of covered securities along with basis and acquisition dates for covered lots. If the broker reports a basis on 1099‑B that you disagree with (for example, because you submitted a different lot election), keep supporting documentation (trade confirmations, broker statements) and correct the broker or attach an explanation to your return if needed.

What brokers report on Form 1099‑B:

• Covered sales: broker will report acquisition date, sale date, proceeds, basis, and whether the gain/loss is short‑ or long‑term (based on acquired date).
• Noncovered sales: broker typically reports proceeds but may not report basis or acquisition date—taxpayer is responsible for supplying basis.
• Because can i use average cost basis for stocks is a frequent concern, verify whether your 1099‑B used average cost for fund sales and whether that aligns with your own records.

When you receive multiple 1099‑B statements (e.g., from different brokers or for different accounts), reconcile totals, ensure your Schedule D/Form 8949 entries match broker reporting, and correct any basis mismatches timely.

Wash Sales, Adjustments, and Transfers

Wash sales: if you sell a security at a loss and buy substantially identical shares within 30 days before or after the sale, the loss is disallowed for current deduction and instead added to the basis of the replacement shares. Wash‑sale adjustments create basis tracking headaches—especially with frequent trades or reinvestments. Brokers may attempt to identify wash sales for you, but taxpayers remain responsible for correct reporting.

Transfers, gifts, and inherited shares: different rules apply. Gifts typically carry the donor’s basis (with special rules when donor’s basis exceeds FMV), and inherited shares usually receive a stepped‑up basis to fair market value at the decedent’s date of death (unless alternate valuation applies). These nonpurchase acquisitions are handled differently from typical buys and may not be eligible for average basis pooling.

Special Notes on Cryptocurrency (Brief)

Cryptocurrencies are treated as property, not securities, under current IRS guidance. The cost‑basis and reporting regime for crypto differs from equities. There is not yet a uniform broker‑reporting system for crypto that parallels the covered securities rules for equities; therefore, can i use average cost basis for stocks is not the same question for crypto. Specific identification can be used for crypto if you can clearly identify units sold; however, tracking is often more complicated. For crypto wallets and custody, consider using Bitget Wallet and consult a tax professional for up‑to‑date guidance.

Pros & Cons of Using Average Cost (When Allowed)

Pros:

• Simplifies basis tracking when you have many small reinvestment purchases and fractional shares.
• Reduces the administrative burden of tracking multiple lots and fractional share records going back many years.

Cons:

• Removes lot‑level control for tax planning (you cannot select high‑basis lots to minimize gains or harvest losses selectively).
• May lock you into a method for covered shares until the broker allows a change and may not be retroactive.

How to Elect or Change a Cost Basis Method

Practical steps:

• Check your broker account settings and cost‑basis FAQ to see the current default for each holding (mutual fund, ETF, or stock).
• If you want average cost where it’s allowed (typically mutual funds/DRIPs), follow the broker’s written or electronic election process—this may be an account‑level option or a holding‑level instruction.
• To use specific identification for a sale, specify the lot(s) at the time of sale using the broker’s required format and retain confirmations of the lot selection.
• When changing methods, confirm whether the change is prospective only for newly acquired covered shares and whether it affects noncovered shares.
• Request written confirmation of any method change from your broker and save it with your tax records.

Because can i use average cost basis for stocks depends on security type, always verify the broker’s procedures and ensure your elections are documented before trades execute.

Frequently Asked Questions (Short)

• Q: Can I use average cost for an individual stock I bought on the open market?

  A: No—average cost is generally not allowed for ordinary individual stocks. Use specific identification or accept FIFO if you don’t specify lots.

• Q: What happens if I can’t identify lots?

  A: The broker will generally apply FIFO and report that on Form 1099‑B for covered lots; you will need to report accordingly unless you have documentation to support a different method.

• Q: Does average cost apply to ETFs?

  A: Sometimes—many brokers permit average cost for ETFs that they treat as fund‑type holdings. Confirm with your broker whether a specific ETF is eligible for average basis pooling.

• Q: How does a DRIP affect my options?

  A: DRIP reinvestments create many small purchases; brokers commonly permit average cost for pooled DRIP lots. But for covered DRIP shares, elections may be prospective only.

When to Consult a Tax Professional

Seek professional advice if you have:

• Complex lot histories across multiple brokers or accounts;
• Frequent wash‑sale issues or trades that trigger wash‑sale adjustments;
• Large portfolios with mixed stock, fund, and crypto positions where method selection materially affects tax outcomes;
• Estate, gift, or inherited securities with special basis rules.

A tax professional can help reconcile broker 1099‑B reporting, complete Form 8949 appropriately, and document specific identification or method elections.

Sources and Further Reading

Primary authoritative sources and broker guidance include:

• IRS Publication 551: Basis of Assets
• Instructions for Form 1099‑B and Schedule D
• IRS cost‑basis FAQs and official notices
• Major brokerage cost‑basis help pages (for broker‑specific procedures)
• Investor education summaries from reputable financial education sites

As of 2026‑01‑14, according to IRS guidance and major brokerage FAQs, the covered‑security rules continue to define what brokers must report and which basis methods they will accept. Investors should consult the IRS publications listed above and their broker’s cost‑basis documentation when making elections.

Final Notes & Next Steps

Remember the core point: can i use average cost basis for stocks? For ordinary individual stocks, the answer is generally no; for mutual funds, many ETFs, and DRIP pools, the answer is often yes. If you prefer pooled simplicity for funds or DRIPs, elect average cost where allowed. If you need lot‑level control for tax planning with stocks, use specific identification and document your lot selections with your broker.

If you trade or custody assets with a platform, consider Bitget for custody and trading needs and Bitget Wallet for web3 storage—check Bitget’s cost‑basis support and reporting features in your account settings. For any complex tax situation, consult a qualified tax advisor to confirm which methods apply to your holdings and how to reconcile broker reporting with your tax filings.

Want to learn more? Explore Bitget’s help center for account‑level instructions on cost‑basis elections and Bitget Wallet for secure custody of digital assets.