FREE NEWSLETTER
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:
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:
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.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
My daughter received shares of 3 stocks after her mother-in-law’s passing. Knowing the date of death, could she use the “adjusted close” values of those stocks from historical information and calculate cost basis?
It is my understand to determine step-up basis on individual stocks, one would add the opening price and closing price for the date of death then divide the total by two to get the average price that is used for the step-up basis.
Spot on … and if she passed on the weekend or holiday, you do the same calculation for the business days before and after and then average those.
My parents had a number of brokers that transferred to new companies, one a couple of times. The stocks came across in the new statements, but not the basis! Not one of the brokers indicated that the purchase date and price needed to be added! When mom moved to assisted living, those three shelves of looseleaf binders containing 5 to 7 decades of information, went in the trash, containing the necessary information to trade her stocks as POA. There was no way to even “ best guess “ the basis to satisfy the IRS requirement. It took another eight years till her passing at the age of 100 to get a new basis.
Sorry you lost your Mom but 100 is a great achievement! If you inherited her longevity, it can help with planning decisions (e.g., Social Security and annuities).
Great article, Aaron. Thanks.
A few years ago I decided to sell some mutual funds I’d owned for decades. The problem was that the brokerage firm where I originally held them had been taken over by another firm, and from there I had later transfered the funds to Schwab.
In this scenario, cost basis info. was no longer available to me. Fortunately, I keep paper files forever (to my wife’s chagrin), so I found the original costs and then manually added in untold years of reinvested dividends and capital gains distributions.
Good way to ruin a weekend, but I got it done. And as you say, Schwab allowed me to manually enter my ultimate adjusted basis figures in my account.
I guess the moral of the story is that if you move assets from one brokerage firm to another, make sure the cost basis info. moves with them.
Many years ago my then father in law gave me a share of IBM stock. He also gave a share to my wife, and he also gave a share to us jointly. This was back in the late 70’s. We elected to reinvest dividends for all shares. I had a file for this particular gift that had all dividend, stock split, and expense notifications. When we divorced in the mid-2000’s, I had a spreadsheet that tabulated everything, including the basis. It was an extreme pain in the a$$, but we came out ahead as a result of my anal-retentive record keeping. The alternative would have been to identify the sale as 100% capital gain.
Are you open to job opportunities? Kidding aside…sorry about the divorce but glad you are good at recordkeeping!
Happily retired, so “no” to the job request. And now I use Quicken to keep track of stuff. Plus – the divorce was a very good thing. I’m very happily remarried.
This article is another reason not to own individual stocks. Also it appears that dividend paying stocks may be even more troublesome.
so here’s the weekend puzzle for Aaron. If I bought 10 shares for AT&T (NYSE: T) in 1989, what’s my cost basis ? 🙂
Nice try! I should have mentioned it in the article but investor relations (people and website) can sometimes be helpful for shares in individual companies.
Thanks for the very useful article Aaron. It reminded of a tax return I prepared several years ago as part of AARP’s VITA program. The client had worked for the local Bell company in the 80s, and had participated in the employee stock purchase plan for a number of years, before leaving the company for a different job. They held onto the shares for about three decades, before finally selling them to finance their daughters wedding in 2018. They had absolutely no idea of the cost basis. they shares had been bought piecemeal over a number of years. By interviewing the clients I determined they had bought a fixed dollar amount each month, and they had a good idea of the start and end dates based on job start and stop dates. I built a spreadsheet using historical prices for those years and months, and matched it up to the number of shares they ultimately sold. I checked this with the senior leader for our tax prep site and she thought it was a valid estimate and the client was happy they didn’t have a zero cost basis.
My widowed aunt had shares in the Baby Bells obtained from the Ma Bell breakup. The basis calculation was quite an ordeal and her broker was useless. Her accountant took a swag at it and prepared the return. Another mindfield for basis calculations is demutualizations of insurance companies. My mother in law is still holding shares from the MassMutual demutualization. It will be some work to figure out one day.
Ouch – sorry! Demutualizations are complicated and the IRS has taken some tough stances on these cases. Note: Some custodians will permit borrowing against portfolio values. It always depends on the broader situation but if the total cost of borrowing (~rate x years) is less than the capital gains taxes, that could be a viable route. Good luck!
If you gift the shares to a charity does it matter what your basis is? Don’t you get to deduct the value of the shares on the date you gave it? The charity certainly doesn’t have to pay taxes when they sell the shares.
You are correct. FWIW – Donor-advised funds can be useful so you can get the tax benefit even if you have not yet decided which charity.
Even if you’re with a firm that keeps records of cost basis, be careful when consolidating assets under them from elsewhere. Take note of cost basis before transferring assets in kind, so that if they don’t come over with that information, you can easily have it updated.
It’s easier to do brain surgery than to comply with IRS rules and guidelines.
That’s because of the “brain surgeons” who write and pass the laws! 🙂