Cost Basis and Your Taxes: Keeping Detailed Account Records is Important

Selling an investment typically has tax consequences. To figure out whether you need to report a gain—or can claim a loss—after you sell, you must start with the cost basis for that investment. For stocks or bonds, the cost basis is generally the price you paid to purchase the securities plus any other costs such as the commission or other fees you may have paid to complete the transaction. You usually get this information on the confirmation statement that the broker sends you after you have purchased a security.

 

The Internal Revenue Service (IRS) expects an investor who has sold securities to report cost basis accurately. In 2008, Congress passed a law that requires brokerage firms, mutual funds and others to report cost basis information to both investors and the IRS on Form 1099-B when you sell:

 

  • shares of stock you acquired on or after January 1, 2011;
  • shares of stock in a Regulated Investment Company (RIC) or Dividend Reinvestment Plan (DRP) you acquired on or after January 1, 2012; and
  • options, fixed income securities and other securities as determined by the IRS, you acquired on or after January 1, 2014.

 

The IRS provides more information about how this process works in its Instructions to Form 1099-B. What’s important for investors to know is that they should receive a copy of the filing by February 15. Review the information on your copy of Form 1099-B as soon as you get it. Check that the amount of cost basis your broker reports to the IRS matches your own records—and if the amounts differ, contact the broker immediately to discuss any errors you find.

 

Keeping good records of your transactions is important to establish cost basis accurately. Hold on to trade confirmations showing how much you paid for specific shares or keep track of that information on your own records at home. Keep track of stock dividends or non-dividend distributions you receive because they may affect the cost basis of your shares. If you purchased stock of a company at different times and prices, and can adequately identify the shares you sold, their basis is the cost for those specific shares. If you cannot determine exactly which shares you are selling, tax rules will require you to calculate a gain or loss as if you are selling the earliest acquired shares. If you received the securities as a gift or through an inheritance, you may have to find the fair market value when it was given to you or the previous owner’s adjusted basis. IRS Publication 550: Investment Income and Expenses offers detailed guidance on how to calculate cost basis under different circumstances. To report your gain or loss, follow the Instructions for IRS Form 8949.

 

The IRS expects you to keep and maintain records that identify the cost basis of your securities. If you do not have adequate records, you may have to rely on the cost basis that your broker reports—or you may be required to treat the cost basis as zero. For this reason, you may want to check whether you have cost basis information for any securities you want to sell before you do so.