Cost basis is a crucial piece in determining how much gain/loss from the sale of an investment will be reported on your tax return.

Despite cost basis being so important, required accurate reporting of cost basis by custodians has only been in effect since 2011 for stocks (and 2012 for mutual funds). Therefore, it is important to review assets held in your investment accounts that may have been purchased before the custodial tracking requirement was established. Doing so may save you a headache when it’s time to file your tax return.

What is cost basis?

Cost basis is the original purchase price (or value) of an asset. When you sell an asset, the gain/loss realized is the difference between the cost basis and the amount you received at the time of sale. This gain/loss is reported when you file your tax return. Therefore, reviewing your cost basis before you sell can help determine how much gain/loss may be subject to taxation.

Sounds simple, right? The tricky part of cost basis is that it may be adjusted depending on certain circumstances. Your adjusted cost basis may be different from your original purchase if there have been stock splits, corporate spinoffs, or return of capital. For example, let’s say you purchased 100 shares of stock XYZ in 2005, at $10 per share. In 2010 there was a spinoff of ABC. Therefore, you now currently hold both stock positions. What’s the cost basis of each stock? In order to determine the adjusted cost basis of each, you will need to look back at the direction given by the company. It is likely there is a portion of the original basis that was allocated to XYZ, and a portion that was allocated to ABC. One place to find this information is in the “investor relations” section of the company’s website.

What is the cost basis if you received the asset as a gift?

If you received the asset as a gift, then the basis of the original purchaser transfers to you and remains your basis. For example, your parents purchased XYZ in 2005 at $10 per share, then gave you the stock a year later when the stock price was $15 per share. Your basis is not $15 per share; rather, it is the original purchase price of $10 per share (subject to any adjustments).

What is the cost basis if you inherited an asset?

If you inherited an asset, the asset may be eligible for a “step up” in basis. This means the basis of the asset is now the fair market value as of the date of death of the deceased. To determine if the asset is eligible for a “step up,” you should consult with your advisor.

What should you do if you have figured out the cost basis for a security that was missing cost basis?

If you have determined what your cost basis is, reach out to your investment advisor. Your advisor can help you reconcile this information with the custodian so you won’t have to worry about the headache of determining cost basis when your taxes are filed.

These steps may seem burdensome, but the good news is that basis for stocks purchased after 2011 (or mutual funds purchased after 2012) is now tracked by the custodian. Therefore, digging for cost basis should only apply to purchases (or assets inherited), before this time. When you sell a stock that was purchased after 2011 (or a mutual fund purchased after 2012) in your investment account, the basis should be reported on the 1099 tax form sent to you by the custodian. This form should help you report the gain/loss on your tax return. Please consult a tax and investment advisor for guidance on reporting your cost basis.

This is intended for informational purposes only and should not be construed as tax or investment advice. Please consult your tax and investment professional(s) regarding your unique circumstances.

Author Teryn A. Fitzgerald Financial Advisor

Teryn has been involved in the financial services industry since 2009. She is a member of Cents of Self, an initiative that inspires, informs, and empowers women to pursue their best financial futures.

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