How to Calculate Adjusted Cost Basis of Stock

Adjusted Cost Basis Formula:

\[ ACB = Purchase\ Price + Commissions - Return\ of\ Capital \]

Adjusted Cost Basis (ACB):

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1. What is Adjusted Cost Basis?

Adjusted Cost Basis (ACB) is the original cost of an investment adjusted for various corporate actions such as stock splits, dividends, and return of capital distributions. It is used to calculate capital gains or losses when the investment is sold.

2. How Does the Calculator Work?

The calculator uses the ACB formula:

\[ ACB = Purchase\ Price + Commissions - Return\ of\ Capital \]

Where:

\( Purchase\ Price \) — The original price paid for the stock
\( Commissions \) — Brokerage fees and transaction costs
\( Return\ of\ Capital \) — Distributions that reduce your cost basis

Explanation: The formula calculates the true cost of your investment by including all acquisition costs and subtracting any capital returns.

3. Importance of ACB Calculation

Details: Accurate ACB calculation is crucial for determining capital gains tax liability when selling investments. An incorrect ACB can lead to overpayment or underpayment of taxes.

4. Using the Calculator

Tips: Enter all values in dollars. Purchase price and commissions should be positive values. Return of capital represents distributions that reduce your original investment cost.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between cost basis and adjusted cost basis?
A: Cost basis is the original purchase price, while adjusted cost basis includes all adjustments for corporate actions and transaction costs.

Q2: Why subtract return of capital?
A: Return of capital distributions are not taxable income but rather a return of your original investment, thus reducing your cost basis.

Q3: How do stock splits affect ACB?
A: Stock splits adjust the per-share cost basis but not the total ACB. For example, in a 2-for-1 split, your shares double but cost basis per share halves.

Q4: Are dividends included in ACB?
A: Regular dividends do not affect ACB. Only return of capital distributions and certain other corporate actions adjust the cost basis.

Q5: How is ACB used for tax purposes?
A: ACB is subtracted from the selling price to determine capital gains or losses for tax reporting purposes.