Average Basis: Investment Taxes (2025 IRS Guide)

This guide covers “Average Basis” within investment taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 550 (2025), Investment Income and Expenses, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficult. However, shares are generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. You can choose to use either a cost basis or an average basis to figure your gain or loss.

Average Basis

You can use the average basis method to determine the basis of shares of stock if the shares are identical to each other, you acquired them at different times and different prices and left them in an account with a custodian or agent, and either:

• They are shares in a mutual fund (or other regulated investment company);

• They are shares you hold in connection with a DRIP, and all the shares you hold in connection with the DRIP are treated as covered securities (defined later); or

• You acquired them after 2011 in connection with a DRIP.

Average basis is determined by averaging the basis of all shares of identical stock in an account regardless of how long you have held the stock. However, shares of stock in a DRIP are not identical to shares of stock with the same CUSIP number that are not in a DRIP. The basis of each share of identical stock in the account is the aggregate basis of all shares of that stock in the account divided by the aggregate number of shares.

Transition rule from double-category method.

You may no longer use the double-category method for figuring your average basis. If you were using the double-category method for stock you acquired before April 1, 2011, and you sell, exchange, or otherwise dispose of that stock on or after April 1, 2011, you must figure the average basis of this stock by averaging together all identical shares of stock in the account on April 1, 2011, regardless of the holding period.

Election of average basis method for covered securities.

To make the election to use the average basis method for your covered securities, you must send written notice to the custodian or agent who keeps the account. The written notice can be made electronically. You must also notify your broker that you have made the election. Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949.

You can make the election to use the average basis method at any time. The election will be effective for sales or other dispositions of stocks that occur after you notify the custodian or agent of your election. Your election must identify each account with that custodian or agent and each stock in that account to which the election applies. The election can also indicate that it applies to all accounts with a custodian or agent, including accounts you later establish with the custodian or agent.

Election of average basis method for noncovered securities.

For noncovered securities, you elect to use the average basis method on your income tax return for the first tax year that the election applies. You make the election by showing on your return that you used the average basis method in reporting gain or loss on the sale or other disposition.

Revoking the average basis method election.

You can revoke an election to use the average basis method for your covered securities by sending written notice to the custodian or agent holding the stock for which you want to revoke the election. The election must generally be revoked by the earlier of 1 year after you make the election or the date of the first sale, transfer, or disposition of the stock following the election. The revocation applies to all the stock you hold in an account that is identical to the shares of stock for which you are revoking the election. Once revoked, your basis in the shares of stock to which the revocation applies is the basis before averaging.

Tip:

You may be able to find the average basis of your shares from information provided by the fund.

Average basis method illustrated.

Table 4-2 illustrates the average basis method of shares sold, compared with the use of the FIFO method to figure cost basis (discussed earlier).

Even though you include all unsold shares of identical stock in an account to figure average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first.

Example.

You bought 400 identical shares in the LJO Mutual Fund: 200 shares on May 13, 2024, and 200 shares on May 17, 2025. On November 18, 2025, you sold 300 shares. The basis of all 300 shares sold is the same, but you held 200 shares for more than 1 year, so your gain or loss on those shares is long-term. You held 100 shares for 1 year or less, so your gain or loss on those shares is short-term.

How to figure the basis of shares sold. To figure the basis of shares you sell, use the steps in the following worksheet.

Example 1.

You bought 300 identical shares in the LJP Mutual Fund: 100 shares in 2021 for $1,000 ($10 per share); 100 shares in 2022 for $1,200 ($12 per share); and 100 shares in 2023 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 + $1,200 + $2,600). On May 6, 2025, you sold 150 shares. The basis of the shares you sold is $2,400 ($16 per share), figured as follows.

Remaining shares.

The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis of the shares sold. The next time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made a subsequent adjustment to basis).

Example 2.

The facts are the same as in Example 1, except that you sold an additional 50 shares on December 9, 2025. You do not need to refigure the average basis of the 150 shares you owned at that time because you acquired or sold no shares, and had no other adjustments to basis, since the last sale. Your basis is the $16 per share figured earlier.

Example 3.

The facts are the same as in Example 1, except that you bought an additional 150 identical shares at $14 per share on September 9, 2025, and then sold 50 shares on December 9, 2025. The total adjusted basis of all the shares you owned just before the sale is $4,500, figured as follows.

The basis of the shares sold is $750 ($15 per share), figured as follows.

Shares received as gift.

If your account includes shares that you received by gift, and the fair market value of the shares at the time of the gift was not more than the donor's basis, special rules apply. You cannot choose to use the average basis for the account unless you state in writing that you will treat the basis of the gift shares as the fair market value at the time you acquire the shares. You must provide this written statement when you make the election to use the average basis method, as described under Election of average basis method for covered securities and Election for average basis method for noncovered securities, earlier, or when you transfer the gift shares to an account for which you have made the average basis method election, whichever is later. The statement must be effective for any gift shares identical to the gift shares to which the average basis method election applies that you acquire at any time and must remain in effect as long as the election remains in effect.

Table 4-2. Example of How To Figure Basis of Shares Sold

Note:

Your basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it. For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For more information on basis of property received as a gift, see Pub. 551, or go to IRS.gov/DigitalAssets.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 550 (2025), Investment Income and Expenses: Sales and Trades of Investment Property — How To Figure Gain or Loss — Special Rules for Mutual Funds — Average Basis — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.