How do I compute the basis of stock for IRS form 1116 in part 4(b) of the worksheet?

The IRS requires that you determine the allocation of interest expenses to US and foreign investments using the ratio of the basis of foreign investment assets vs. the basis of total assets. When assests are stock and nothing is bought or sold over the course of the year, the basis value is straigtforward (in fact the instructions for form 1116 and Pub 514 have simple examples for this case).

However it is not clear how this basis should be computed when stocks have been purchased and sold throughout the year. Is the basis the value at either the beginning or end of the tax year perhaps? Computing the average basis over the course of the year is potentially more accurate, but this is very time consuming to calculate even with a modest number of purchases and sales during the course of the year.

So my question is what is the correct way to determine the basis that the IRS will approve of? Pointers to IRS decisions, if any, would be helpful. I couldn’t find any.

Try section 1.861-9T of the Treasury Regulations, 26 CFR section 1.861-9T.

Section 1.861-9T(g)(2)(i) provides:

For purposes of determining the value of assets under this section, an average of values (book or market) within each statutory grouping and the residual grouping shall be computed for the year on the basis of values of assets at the beginning and end of the year.