Cost Basis (the price paid to purchase a security) determines the profit or loss on a security transaction. When assessing a potential profit or loss, there are three ways the cost can be utilized, although only one is applicable for US tax reporting. Moomoo Financial Inc systems currently calculates and displays the real-time cost in two ways, Diluted or Average Cost Basis. The third way, US Tax Reporting Cost Basis is calculated differently than the Diluted or Average Cost Basis and only performed at year end. The US Tax Cost Basis is currently not displayed in the system, but will be reflected on the Tax Form 1099-B.
Diluted Cost Basis
Diluted Cost is the break-even price during the holding period, which means you can sell at this price without profit and loss (do not include commission and other fees). This method considers the profit and loss of every transaction (cash dividends and rights issues are not included) during the holding period. Both buy and sell executions change the diluted cost. The profit and loss when you sell the securities will raise or lower the cost of positions and may even make it a negative number.
How to Calculate Diluted Cost
Diluted Cost = (Total dollar amount of Buy executions within the holding period - Total dollar amount of Sell executions within the holding period) ÷ Quantity
Average Cost Basis
The average cost of a stock (excluding commissions and fees) uses the purchases made in the account to calculate the average. The gain or loss corresponding to the sale of a stock does not dilute the average cost but is converted to realized gain or loss.
How to Calculate Average Cost
Average per share cost = Total dollar amount of buys ÷ Total quantity purchased
US Tax Reporting Cost Basis
US Tax Reporting Cost Basis is the actual price paid (excluding commissions and fees) to acquire a security. While there are a few exceptions that can change the cost reported to the IRS like wash sales and
options, the price paid is used to calculate profit/loss and is what will be reported on the Tax Form 1099B.Average Cost and Diluted Cost Basis are not approved cost basis methodologies for US Tax Reporting purposes.IRS Approved Cost Basis Methodologies for
Stocks and Options
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FIFO - First In First Out
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LIFO - Last In First Out
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HIFO - Highest In First Out
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LOFO - Lowest In First Out
Currently, Moomoo only utilizes the FIFO (First In First Out) methodology when reporting cost basis for the IRS but is considering additional options for the future.
How to Calculate US Tax Reporting Cost Basis
US Tax Cost = Price paid per share (after deduction of commissions and fees)
Example of Average vs. Diluted Cost Basis vs US Tax Reporting Cost Basis
If the customer does not hold Alibaba (BABA) before TDay, and buy 100 shares at $200/share on T Day, then
Diluted Cost = (Total dollar amount of Buy executions within the holding period - Total dollar amount of Sell executions within the holding period) ÷ Quantity
= $200
Average Cost = Total dollar amount of buys ÷ Total quantity purchased
=$20,000 ÷ 100
= $200
US Tax Cost = Price paid per share
= $200
Disclaimer: We do not provide tax advice and any tax-related information provided is general in nature and should not be considered tax advice. Consult a tax professional regarding your specific tax situation.