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What Methods Can I Use to Determine the Cost Basis of My Stocks?

Q. Once you have used one of the cost basis methods, average cost, LIFO, or FIFO, is there any reason you must stick with that method for the rest of the lifespan of the stock in your DRIP portfolio? Can you apply a different method for 2 different stocks, i.e., FIFO for stock A and LIFO for stock B?

A. First, you can't use the average cost basis method for stocks, only for mutual funds.

I also believe that you are limited to using either the FIFO or specific lot basis when you sell shares of stock. LIFO isn't an option on its own (though the specific lot method would let you accomplish the same goal). In order to sell specific lots, you must be able to "adequately identify the shares of stock you sold" according to the IRS's guidelines.

I believe you can use a different method for each stock you own, but once you use a particular method you must stick with it for the remainder of that stock holding.

Here is the excerpt from the IRS's Publication 550 that explains how the cost basis can be calculated. Just remember that I'm not a tax expert, so before you rely on my interpretation of the IRS's guidelines, you should consult them yourself, or with an accountant or tax preparer.