What Did We Pay?

Aaron Brask

WHAT’S THE COST BASIS of the stocks you own? It’s hardly surprising that this information occasionally gets lost, especially if we’re talking about shares acquired years or even decades ago. In fact, you may never have known the cost basis if you received the shares as a gift and, to make things even more confusing, the IRS has quirky rules for gifted shares.

Whatever the reason, many people are missing cost basis information—a significant problem because cost basis directly affects the taxes you may have to pay when selling investments held in a regular taxable account. That said, three sets of investors have less reason to worry.

First, if you inherited taxable-account assets, the original cost basis doesn’t matter. Instead, such assets generally receive a step-up in cost basis to their fair market value as of the original owner’s date of death. Second, you may be in the 0% tax bracket for capital gains. Even if you have to assume a zero cost basis, no taxes may be owed. Third, you might be planning to gift the shares to charity or leave them to your heirs, in which case the original cost basis becomes irrelevant.

What if the above situations don’t apply? To determine your cost basis, you’ll typically need:

  • the original date of purchase, number of shares and purchase price.
  • the dates and amounts of any subsequent investments, including dividends reinvested in additional shares.
  • any relevant corporate actions, such as mergers, acquisitions, spinoffs, stock splits, fund conversions and so on.

To track down the information, try to locate the original trade confirmations from the broker or custodian through which you purchased the shares. This information would also be in the brokerage statement for the month in which you purchased the shares. Even later statements might include helpful information, such as the date of purchase or the original price.

Failing that, the next step would be to check with the financial firm where the shares were purchased or are currently held. Financial firms weren’t required to keep cost basis information prior to 2011. Still, many firms maintain records from earlier. You could get lucky.

No luck? You may have to estimate the cost basis. If you make a good faith effort based on reasonable calculations and documentation, there’s a good chance you’ll be fine. What if the IRS challenges it? You may have to assume your basis is zero, in which case 100% of any sale would be considered capital gain.

Let’s assume you’ve left no stone unturned and have to make an estimate. Presumably, you already have the current value and number of shares you own. If you have physical share certificates, you can track down the company that maintains records for those shares and see if it can help. The firm’s name should be listed on the share certificates, but you might have to do some sleuthing—try Google—if the company has changed names or been acquired.

A key piece of information you’ll need is the original purchase date. This will be earlier than the date on which the shares were gifted—assuming they were gifted. You may have to estimate this, but try to back it up with some documentation, if possible.

With the exact or estimated purchase date in hand, you could work backward from the current price to estimate the cost basis. You might be able to simply take the number of shares you own and multiply it by the stock price on the purchase date. This will require access to historical stock price data. Luckily, there are many free online sources, but there are also a few potential pitfalls:

  • Dividends, if relevant, should be factored into the calculation. Did you receive the dividends or were they reinvested?
  • Many stocks have split their shares. For example, 400 shares today might have been just 40 shares when the stock was bought. Most data sources factor this in, but it’s easy to miss.
  • In addition to stock splits, companies may also have been acquired, been spun off or merged over the time you owned the shares. Getting a handle on this can be complicated, but it’s still doable.

I generally use Portfolio Visualizer, an online tool that includes historical performance calculations, for simpler cases, or a spreadsheet for more complex situations. Even if you don’t know how many shares were originally bought, you may be able to calculate the cost basis if you know how the investment performed over the time you’ve owned the shares.

If you can find or estimate your cost basis, you or your financial advisor may be able to manually enter it into your brokerage account. I’ve done this with Charles Schwab, and I suspect other brokerage firms offer a similar service.

Once you get the data into the brokerage firm’s system and sell your holdings, it should make the required calculations and automatically include the information on your next 1099 tax report. Problem solved. Not an option? You may have to enter this data directly into IRS Form 8949 when filing taxes for the year in which the stock was sold.

Aaron Brask is an investment advisor based in West Palm Beach, Florida. His practice and research focus on low-cost, tax-efficient strategies for investing and retirement. Outside of work, Aaron enjoys sports, traveling, and spending time with his wife and two young children. His previous article was Not Just a Number.

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