I’m have a bit of a hard time understanding cost basis, at least in one situation that I have now for my taxes.
I get that the cost basis is how much I’ve paid for a stock over time. So if I buy 100 shares of stock for $1000 total, my cost basis is the $1000. Easy enough. If I buy the same 100 shares of stock and reinvest my dividends for 10 years the cost basis is the $1000 plus all the dividends I’ve gotten in the last 10 years.
Now for the part I can’t wrap my head around, and it’s what I have to deal with for my taxes this year. I get 100 shares of stock in 2000, I reinvest the dividends. In 2005 I sell 25 shares. At the time I seem to have done my cost basis for those I sold. Last year I sold another 25 and I haven’t a clue as to how to do my cost basis.
My father, the one who gave me the stock, tried to help me out, but I couldn’t make heads or tails of it. Something about using the average price of the stock as it was bought,which I kind of get, but then he told me that in my case, selling for a second time, I’m to average the cost of only my dividends between 2005 and 2013. But that doesn’t make total sense to me since I’m selling some of my original stock so shouldn’t I also, some how, be using the price of when it was originally bought as well?
I know I’m missing one key thought process, I just can’t see where.