Purchase Price in Finance: Effect on Capital Gains

What the purchase price is

The purchase price is the amount an investor pays to acquire an investment. It becomes the investor’s cost basis for calculating gains or losses when the investment is later sold. The purchase price typically includes commissions or sales charges.

Calculating cost basis for multiple purchases

When an investor buys the same security on multiple occasions, a weighted average cost per share is commonly used to determine the cost basis.

Weighted average cost formula:
Weighted average cost per share = (Total dollars spent on purchases) ÷ (Total shares purchased)

Example:
– Purchases: 100 shares at $40, 100 shares at $60, 100 shares at $80
– Total spent = $4,000 + $6,000 + $8,000 = $18,000
– Total shares = 300
– Weighted average cost = $18,000 ÷ 300 = $60 per share

Include commissions in the dollar totals when computing the weighted average. If commissions raise the total cost, the weighted average cost per share will be higher (for example, approximately $62 per share after commissions).

You can recalculate the weighted average when you add more shares by adding the new dollars spent and the new shares to the totals.

Adjusting the calculation for partial sales

If you sell only a portion of your holdings, the weighted average cost can be used to determine the cost basis of the shares sold. Subtract the shares sold from the total and, if needed, recompute the weighted average for the remaining position.

Realized vs. unrealized gains

• Unrealized gain/loss: Increase or decrease in value of a holding that you still own; not reported for tax purposes.
• Realized gain/loss: Gain or loss that occurs when you sell all or part of an investment; reported for tax purposes.

Example of a realized gain:
– Sale: 100 shares sold at $80 per share
– Cost basis used: $62 per share (weighted average including commissions)
– Realized gain per share = $80 − $62 = $18
– Total realized gain = $18 × 100 = $1,800

If the holding was owned for more than one year, the gain is typically treated as a long-term capital gain. Realized gains and losses are reported (for example, on Schedule D of IRS Form 1040 in the U.S.) and are netted against each other; the resulting net gain or loss is subject to capital gains tax rules.

Key takeaways

• The purchase price (including commissions) is your cost basis for calculating gains or losses.
• For multiple purchases of the same security, use the weighted average cost to determine per-share basis.
• Realized gains (from sales) are taxable and must be reported; unrealized gains are not.
• Keep accurate records of purchase prices, commissions, and holding periods to calculate cost basis and tax treatment correctly.