Final answer:
To calculate capital gains or losses from stock sales, taxpayers must determine the adjusted basis of the stock, which often starts with the original cost and can be adjusted for reinvested dividends, stock splits, or mergers.
Step-by-step explanation:
Taxpayers may use several methods to determine the adjusted basis of stock they have sold which is essential to calculate capital gains or losses for tax purposes. The commonly recognized method is the cost basis, which is the amount originally invested in the stock plus any associated costs such as commissions and fees. If stocks were purchased at different times and prices, an average cost may be calculated, or specific identification of shares can be used, where the taxpayer selects the particular shares sold and uses the cost basis of those shares.
Additional adjustments to the basis may be required if the taxpayer received dividends that were automatically reinvested to purchase more shares, leading to a higher basis. Sometimes, if the stock splits or a company merges, the basis needs adjustment too. All these factors ensure the gain reflects the actual economic increase in value, consistent with the example of a financial investor buying a share of stock in Wal-Mart for $45 and then later selling it for $60, thus realizing a gain of $15.