Average Cost Method
For mutual fund shares and dividend reinvestment plans.
For shares of a mutual fund (regulated investment company) and stock acquired through a dividend reinvestment plan, you may use the average basis method: total cost of all shares in the account divided by the number of shares (Treas. Reg. § 1.1012-1(e)). Many fund companies use it as their default for these shares. It is not available for ordinary stock held outside a DRIP.
Example: a fund with reinvested dividends
| Event | Shares | Amount |
|---|---|---|
| Buy at $10 | 100 | $1,000 |
| Buy at $16 | 50 | $800 |
| Dividend reinvested at $12 | 10 | $120 |
| Total | 160 | $1,920 |
Average basis = $1,920 ÷ 160 = $12.00 per share.
You sell 80 shares at $15 = $1,200. Basis = 80 × $12.00 = $960. Gain = $240.
For the holding period, shares are treated as sold first-in, first-out: the first 80 shares sold come from the oldest purchase. The remaining 80 shares keep the $12.00 average basis ($960).
Things to know
- The reinvested dividend was already taxed as income, so it is added to basis. Forgetting it means paying tax twice.
- The election is made with the broker or fund (typically in writing or online) and applies to the shares in that account.
- A change from average cost to another method generally applies only going forward; shares already averaged keep their averaged basis. Check your broker's rules before switching.
- For noncovered shares (fund shares bought before 2012), the broker may track them in a separate average.
Frequently asked questions
Does average cost make my taxes lower?
Not necessarily. It is simpler. Specific identification can produce a lower gain if you pick high-cost shares, but it requires choosing lots on each sale.
Can I use average cost for individual stocks?
Only for stock acquired in a dividend reinvestment plan that meets the regulations. Ordinary stock purchases use FIFO or specific identification.
Sources
Last reviewed: November 2026