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Series 7 practice questionhardTax Implications — Cost Basis

An investor purchased 500 shares of a mutual fund over several years via automatic investment. The total invested was $15,000 for 500 shares. Using the average cost method, 200 shares are sold for $40 per share. What is the capital gain?

  1. A$2,000✓ Correct answer
  2. B$2,500
  3. C$3,000
  4. D$4,000
Explanation

Why A — $2,000

Average cost per share = $15,000 / 500 shares = $30 per share. Selling 200 shares at $40: Gain = ($40 - $30) x 200 = $10 x 200 = $2,000. The average cost method simplifies basis calculations for mutual fund investors who have made many purchases at different prices over time. All shares are treated as having the same average basis.

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