If you sold stocks or mutual funds last year, hopefully you made a tidy profit (whoo-hoo!). Of course, Uncle Sam wants his cut of the profits, which are considered capital gains. The tax you owe will depend on your income bracket and how long you’ve owned the investments. If you owned them for a year or less, you pay tax at your ordinary rates; if held longer than a year, you pay tax at favorable capital gains rates.
Even if you lost money, the IRS still wants to know, so either way you must figure out the original cost of the investments – the cost basis – in order to accurately calculate gains or losses.
How to Figure the Cost Basis of Your Investment
Many people think the cost basis of their investment is simply what they paid for it. But what if you’ve reinvested the dividends? What if you received investments as an inheritance or a gift and have no idea when they were originally purchased?
Cost Basis for Investments You’ve Purchased
The first place to look for the cost basis for investments that you’ve purchased is the purchase record you received from your broker. If you’ve been investing on a regular basis, the cost basis will be different for each purchase depending on what the investment’s price was that day.
If you only sold part of your shares in a company last year, how do you know which cost basis to use? For stocks, you will use the first-in, first-out (FIFO) method, which means the first shares you sell will be the first ones you purchased, unless you identify a particular lot that is being sold. In the case of most mutual funds, you may use the average cost of all your purchases.
Many individuals pass their portfolios to their children or family members when they die. If the investment you sold was part of an inheritance you received, your cost basis is determined by your family member’s date of death, not when they originally purchased the investment. Several databases exist, including this nifty tool from MarketWatch where you can find a stock’s price on any given day in the past 40 years. As an added bonus, investments you inherit are considered long-term capital gains, even if you sell them right away.
Gifted investments can be the tricky when it comes to determining cost basis, because the cost basis is passed through to you from the original holder. So if your Uncle Bruno hands you 200 shares of GE that he had “lying around” for a few decades, you may have your work cut out for you, especially if Bruno bought the shares on multiple dates.
Figuring the cost basis for your investments isn’t the only thing you’ll need to do to prepare for tax time. View our entire archive of helpful tax articles just for savvy women!