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Determining the tax basis of stock is an important part of computing a capital loss or gain on a stock that you own. The tax basis is the amount used to compute any tax liability that may exist from the resulting sale of a stock. The stock tax basis also helps to determine the amount of the charitable tax deduction or gift and estate tax payable. To determine your stock tax basis, take the following steps.
Step 1—Understand the Factors Affecting Your Stock Tax Basis
It is important to know the date when you obtained the shares of stock. You can usually do this by looking at past statements to determine when the holding period—the date you bought the stock or established the stock position through a dividend reinvestment plan (DRIP)—began. This will also help you determine the price paid, including commissions to the broker.
If you received the stock as a gift, from a parent or grandparent, for example, however, you may require the assistance of a tax professional to determine the tax basis. If you have multiple positions in the same stock, you will need to group them accordingly and determine their cost bases individually.
Step 2—Calculate the Tax Basis
You determine the tax basis by multiplying the total number of shares purchased by the share price. Include in this figure the brokerage commissions or fees that were paid at the time of the transaction (if any).
Stock splits, stock dividends and other events of the corporation that affect your ownership need to be accounted for as well. Your tax basis should change over time up until the time the sell was completed.
Step 3—Compare Stock Cost Bases
Take the final cost basis and compare it to the original basis, from when you first established the stock position. A positive difference between the original cost basis and the sale price represents a capital gain. A negative difference between the two is a capital loss.
A capital loss may be good in the case that you have a short-term capital gain subject to the top tax rate of 35 percent. Losses can be used to wash capital gains and reduce the tax liability. Calculating the stock cost basis helps determine the type of gain or loss you have so that you can use it to make adjustments to your tax liability. Any capital loss that you are unable to apply in a given year may be carried forward for a period of up to 5 years.
Make an Appointment with a Financial or Tax Professional
There are additional considerations about a cost basis in a stock that are best addressed by a financial professional or tax adviser. You should consult with a financial professional who has experience in areas of taxation that relate to your investments. Doing this will help you avoid any mistakes in determining your tax liability.
Step 1—Understand the Factors Affecting Your Stock Tax Basis
It is important to know the date when you obtained the shares of stock. You can usually do this by looking at past statements to determine when the holding period—the date you bought the stock or established the stock position through a dividend reinvestment plan (DRIP)—began. This will also help you determine the price paid, including commissions to the broker.
If you received the stock as a gift, from a parent or grandparent, for example, however, you may require the assistance of a tax professional to determine the tax basis. If you have multiple positions in the same stock, you will need to group them accordingly and determine their cost bases individually.
Step 2—Calculate the Tax Basis
You determine the tax basis by multiplying the total number of shares purchased by the share price. Include in this figure the brokerage commissions or fees that were paid at the time of the transaction (if any).
Stock splits, stock dividends and other events of the corporation that affect your ownership need to be accounted for as well. Your tax basis should change over time up until the time the sell was completed.
Step 3—Compare Stock Cost Bases
Take the final cost basis and compare it to the original basis, from when you first established the stock position. A positive difference between the original cost basis and the sale price represents a capital gain. A negative difference between the two is a capital loss.
A capital loss may be good in the case that you have a short-term capital gain subject to the top tax rate of 35 percent. Losses can be used to wash capital gains and reduce the tax liability. Calculating the stock cost basis helps determine the type of gain or loss you have so that you can use it to make adjustments to your tax liability. Any capital loss that you are unable to apply in a given year may be carried forward for a period of up to 5 years.
Make an Appointment with a Financial or Tax Professional
There are additional considerations about a cost basis in a stock that are best addressed by a financial professional or tax adviser. You should consult with a financial professional who has experience in areas of taxation that relate to your investments. Doing this will help you avoid any mistakes in determining your tax liability.
