What is his cost basis?
Understand the Problem
The question is asking for the cost basis of Professor Ducksworth's investment in Ethereum after he invested $1,000 each month for three months, accumulating 0.85 ETH. The cost basis is essentially the average price he paid per ETH. The goal is to calculate this average based on his total investment over the period.
Answer
The cost basis is approximately $3529.
Answer for screen readers
The cost basis is approximately $3529.
Steps to Solve
- Determine Total Investment
Professor Ducksworth invests $1,000 every month for three months.
So, total investment is:
$$
\text{Total Investment} = 3 \times 1000 = 3000
$$
- Calculate Cost Basis
Cost Basis is defined as the total investment divided by the total amount of Ethereum acquired.
In this case, he acquired 0.85 ETH.
The formula for cost basis is:
$$
\text{Cost Basis} = \frac{\text{Total Investment}}{\text{Total ETH Accumulated}}
$$
- Substitute Values
Now, substituting the total investment and the total Ethereum into the equation: $$ \text{Cost Basis} = \frac{3000}{0.85} $$
- Calculate the Cost Basis
Now, performing the division: $$ \text{Cost Basis} \approx 3529.41 $$
Since cost basis is generally rounded to two decimal places, we will round it to $3529.
The cost basis is approximately $3529.
More Information
The cost basis represents the average price per unit of Ethereum that Professor Ducksworth paid over the three-month investment period. This is a crucial metric for tracking investment performance and potential tax liability.
Tips
- Misunderstanding Cost Basis: Confusing total investment with the cost basis; remember, cost basis involves dividing total investment by the amount of asset acquired.
- Rounding Errors: Not rounding correctly can lead to discrepancies in the final answer.