Adjusted cost base is a formula applied to assets to help people determine how much their total assets really cost by showing an average per-unit cost. Using the adjusted cost base formula is fairly simple, but it requires that the investor knows how many assets were purchased, how much each one cost and any commissions fees associated with buying the assets. In countries and areas that have capital gains tax, this figure is used as the overall cost for each asset. Most areas make this formula mandatory, but it still helps investors by allowing them to compare asset prices to the current market.
When the adjusted cost base is used, it adjusts the cost of all assets by showing the investor the overall average. Nearly any type of financial vehicle can be used in this formula, but it is most common with stocks and other assets that are purchased in a high volume. If the investor purchased assets at a single price, such as $20 U.S. Dollars (USD) per stock, then there is no reason to use this formula unless there are substantial commissions.
Adjusted cost base is best used when the investor purchased stocks of varying prices. To figure out the cost base, the investor must multiply the number of stocks by the price. For example, if one financial vehicle is 300 stocks at $20 USD, then this figure comes out to $6,000 USD. This is done for each different financial vehicle and any commission prices, and all the figures are added together. The total figure is then divided by the number of assets — the number of commissions does not matter — and the resulting number is the adjusted cost base.
During tax time, investors with any capital gains must report it for capital gains tax. For the cost portion of this tax, investors are expected to use the adjusted cost base figure. This usually ends up lowering the amount of money investors would have to pay in tax, because it normalizes cost.
While there are benefits to using the adjusted cost base measurement, many countries and regions make it mandatory for investors. This is because it makes calculating taxes easier and the costs generally are more accurate. Investors commonly use this figure outside of tax time to see if their average asset costs are higher or lower than the current market, so they can see if they are making effective buying decisions.