- I bought 100 shares of xx on day 1 for $10.
- I bought 100 shares of xx on day 2 for $5.
- I sold 100 xx on day 3 for $2.
Can the sale be against the $10 stock, i.e. a loss of $8/share? Alternatively, must it be against the average of $7.5/share?
What is a Capital Gain?
Simply stated, the gain or loss on the sale of a share is the proceeds of disposition less the adjusted cost base or ACB. For tax purposes, the taxable portion of a gain or loss is 1/2 of the gain or loss.
Proceeds of Disposition (Proceeds of The Stock Sale)
The proceeds of disposition is simply the amount you received from selling a stock, bond or mutual fund. Deduct any commissions paid to the broker to arrive at new proceeds of disposition.
Adjusted Cost Base
The adjusted cost base is the price you originally paid for the stock or other investment, less any commission paid to your broker, and less any return of capital (you may run into return of capital with certain mutual funds).
When you have purchased the same shares over a period of time and then sell a portion of your holdings you must use the average adjusted cost base per share. In the information provided,
The total adjusted cost base before the sale:
$1,500 = (100 x $10) + (100 x$5)
And your average adjusted cost base per share is:
$7.50 = ($1,500 / 200)
When you sell your 100 shares on day 3 for $2 each you will have a loss of:
$550 = 100 x ($2.00 – $7.50). Of this loss only $275.00 may be claimed as a capital loss for tax purposes.
The loss is then calculated against the average.
While the topic here is calculating the adjusted cost base of multiple purchases of securities it is important to remind you about superficial losses (also called stop losses).
If the same stock or investment was purchased 30 days before or after a sale, any losses are denied. The amount of the loss is added to the cost of re-acquired shares. Similarly, if you sell your shares and your spouse re-purchases the investment the loss will still be denied.
(Thanks to DK for pointing out the importance of this!)