Cost-Basis Defined
A capital investment’s cost basis most often comes up with investments in stock, mutual funds and similar assets were the value tends to change with market behavior. The critical information needed occurs right after the purchase happens; a brokerage provides the detail in a purchase confirmation which details the stock or fund, the number of shares, the date, and the price per share. This data then becomes the cost basis for that asset if it is sold later on.
Why is it Important?
The cost basis provides a critical factor in the formula that determines how much tax is owed when a capital asset is sold later on. So, for instance, 100 shares of stock are bought on January 2 for $50/share. Later they are sold in December for $75/share. Since the cost basis was established at $50/share. The profit made is the difference between the initial purchase price and selling price. In this example the $50/share cost basis means $25/share is profit, or $2,500. The income taxes owed are then computed on the amount of net profit made.
Methods of Basis: Historical Price
As noted above, using historical confirmation provides the most reliable calculation of cost basis. If it is not available but the date of purchase and the stock or fund is known, historical price data can be used. Many Internet sites provide five to ten years of historical price data to the day. This data is provided with the high and low prices for each date. Search the stock, the date, figure out the high and low price, and then find the midpoint of the two. That provides a reasonable cost basis for that stock then.
Methods: Archive Records
If the stock or fund is defunct and the purchase date is not known, then an owner needs to look to archive records to obtain the needed cost basis data. Defunct stocks or funds are not likely going to be available on Internet sites, only active ones. However a trip to the library or archive sites can obtain copies of newspapers that carry the old data. Old copies of the Wall Street Journal can help narrow the pricing down.
Methods: Personal Statements
If the stock is known, it is active, but the date is not known, then this is probably the hardest issue to tackle in finding the cost basis. Old brokerage statements are the salvation of needed data. If the documents don’t exist, but the account is known, an owner can try to seek the old account data from the brokerage. If it has been saved, then the owner is in luck.
Inheritance
Inheritance presents a unique situation since the new owner didn’t buy the stock or fund in the first place, so he or she likely doesn’t receive the purchase data, just the inherited asset. Generally, the cost basis of the inherited asset adjusts to current market value at the time the asset is received by the beneficiary. The new owner should save all documentation showing such inheritance dates and transfer for tax purposes.
Gift
In the case of a conscious gift from another party, unlike inheritance, the cost basis of the stock or fund shares are still the difference between the original purchase price and the value at date of sale. The only adjustment occurs if the asset value is lower at the time of gifting, in which case the cost basis starts with the lower value at gifting. Otherwise, the new owner has a research adventure to figure out the value the original owner purchased the asset at.
Sources:
USA Today: Pay Attention – How to Find the Cost Basis for your Stock http://www.usatoday.com/money/perfi/columnist/krantz/2009-05-13-cost-basis_N.htm
Smart Money: Lost Your Stock Statements? How to Figure Out Your Cost Basis. http://www.smartmoney.com/personal-finance/taxes/figuring-out-your-cost-basis-when-youve-lost-the-statements-9529/
Kiplinger’s Finance: Finding a Stock’s Cost Basis http://www.kiplinger.com/columns/ask/archive/2004/q1206.htm
GainsKeeper: Cost Basis http://www.gainskeeper.com/glossary_CostBasis.html
U.S. Internal Revenue Service: Publication 550 – Investment Gains and Expense http://www.irs.gov/publications/p550/index.html
