Cost Basis Basics—Here's What You Need to Know (2024)

Selling an investment typically has tax consequences. To figure out whether you need to report a gain—or can claim a loss—after you sell, you need to know the cost basis for that investment.

Cost Basis Basics—Here's What You Need to Know (1)

You usually get cost-basis
information on the confirmation
statement that the broker
sends you after you have
purchased a security.

For stocks or bonds, the cost basis is generally the price you paid to purchase the securities, including purchases made by reinvestment of dividends or capital gains distributions, plus other costs such as the commission or other fees you may have paid to complete the transaction. You usually get this information on the confirmation statement that the broker sends you after you have purchased a security.

You—the taxpayer—are responsible for reporting your cost basis information accurately to the IRS. You do this in most cases by filling out Form 8949. (For tax history junkies, this form replaced the Form 1040 Schedule D-1 in taxable year 2011 for most cost-basis reporting.)

You're not totally on your own when it comes to computing cost basis. In 2008, Congress passed a law that requires brokerage firms, mutual funds and others to give you a hand.

Brokerage Firm Responsibilities

The IRS provides FAQs that include information about what cost-basis reporting must be provided by brokerage firms and other financial institutions. Currently, brokerage firms must report cost basis and the type of capital gain (short-term or long-term) on Form 1099-B (or a substitute statement) for the sale of the following types of securities:

  • Shares of stock, including exchange-traded funds (ETFs) that are not treated as regulated investment companies (RICs) for taxation purposes, you acquired on or after January 1, 2011;
  • Shares of stock in RICs and stocks acquired in connection with dividend reinvestment plans acquired on or after January 1, 2012;
  • Specific debt securities (for example bonds with a fixed rate of interest and fixed maturity date), securities futures contracts, options, rights and warrants purchased or acquired on or after January 1, 2014; and
  • All other debt securities (for example zero coupon bonds that convert into interest paying bonds) purchased or acquired on or after January 1, 2016 (this tax information will be reportable on 1099-B forms filed in 2017).

Investors should receive a copy of any 1099-B or substitute statement from their brokerage firm by February 15. Review this information as soon as you get it. Check that the amount of cost basis your broker reports to the IRS matches your own records—and if the amounts differ, contact the broker immediately to discuss any differences you find.

Investors should be aware that there are situations in which a firm may not be required—or is simply unable—to provide a cost-basis for a sale. This could be the case if the securities you sold were purchased many years ago, or if you transferred your holdings from one securities firm to another prior to the new reporting requirements.

If you have questions about what sales are reportable by your brokerage firm, you shouldn't hesitate to contact your financial professional. Many firms also have a section on their website explaining cost basis, and the specific cost-basis information they provide to their customers.

4 Record-Keeping Tips

While brokerages have cost-basis reporting obligations, it's still important to keep good records of your transactions. Follow these tips:

  1. Hold on to trade confirmations showing how much you paid for specific shares or keep track of that information on your own records at home.
  2. Keep track of stock dividends or non-dividend distributions you receive because they may affect the cost basis of your shares.
  3. If you purchased stock of a company at different times and prices, and can adequately identify the shares you sold, their basis is the cost for those specific shares (the IRS calls this "specific share identification"). If you cannot determine exactly which shares you are selling, tax rules generally require you to calculate a gain or loss as if you are selling the earliest acquired shares (sometimes referred to as the "first in, first out" method).
  4. If you received the securities as a gift or through an inheritance, you may have to find the fair market value when it was given to you or the previous owner's adjusted basis.

IRS Publication 550 offers detailed guidance on how to calculate cost basis under different circ*mstances. It's also a sound practice to consult with a tax professional when computing and reporting a gain or loss.

The bottom line is that the IRS expects you to keep and maintain records that identify the cost basis of your securities. If you do not have adequate records, you may have to rely on the cost basis that your broker reports—or you may be required to treat the cost basis as zero. For this reason, you may want to check whether you have cost basis information for any securities you want to sell before you do so.

Cost Basis Basics—Here's What You Need to Know (2024)


Cost Basis Basics—Here's What You Need to Know? ›

For stocks and bonds, the cost basis is generally your purchase price for the securities, including reinvested dividends or reinvested capital gains distributions, plus additional costs such as the commission or other fees you paid to complete the transaction.

How does IRS verify cost basis? ›

Purchase Records

If you purchased the asset, documents from the original sale are the preferred option for verifying cost basis. This can include any brokerage statements, commission statements or other proof of purchase for securities that you purchased.

What if I don't know the cost basis of my stock? ›

Many companies have an investor relations section on their website that contains historical stock data. You can also call the company's shareholder services department for help.

How do I determine the cost basis of my business? ›

How to Determine Cost Basis
  1. A business: The buyer divides the purchase price among all the capital assets in the business, assigning a cost basis to each asset. ...
  2. Stocks and bonds: The purchase price is the initial cost basis, including any brokerage fees or commissions, plus reinvested dividends (if any).
Jul 24, 2022

What is the best cost basis method for selling stocks? ›

First-in, first-out method (FIFO)

This is the default for all investments other than mutual funds. Method implications: Because asset prices tend to rise over time, using FIFO as your cost basis method will have the oldest shares sold first, and those shares will often have the lowest cost basis.

What cannot be included in the cost basis of a main home? ›

The cost includes the cost of materials, equipment, and labor. However, you may not add the cost of your own labor to the property's basis. Add the interest you pay on construction loans during the construction period, but deduct interest you pay before and after construction as an operating expense.

How do you prove cost basis in a home sale? ›

Proving Your Cost Basis

Homeowners should keep good records of improvements they have made to a house, including keeping copies of all receipts and purchase orders. If a joint owner of property dies, you should get the property appraised to show the value at the time it is stepped up in basis.

What is the cost basis for dummies? ›

Cost basis is the original cost of obtaining an asset. It can include the purchase price and any fees. During the time an asset is held, its value can change, due to changes in market value, as well as any depreciation.

What is the formula for cost basis? ›

Cost Basis Accounting and Regulations. If you'd like to use Average Cost for covered mutual fund shares, you don't need to do anything. The cost of shares, including reinvested dividends and capital gains distributions, divided by the number of shares held, is used to compute the average cost of each share.

How do you manually calculate cost basis? ›

You can calculate your cost basis per share in two ways: Take the original investment amount ($10,000) and divide it by the new number of shares you hold (2,000 shares) to arrive at the new per-share cost basis ($10,000/2,000 = $5).

What is included in the cost basis of a home? ›

Put simply: In real estate, the cost basis is the original value that a buyer pays for their property. This includes, but is not limited to, the price paid for the property, any closing costs paid by the buyer and the cost of improvements made (excluding tax credits associated with improvements).

What is an example of a cost basis? ›

Typically, when you purchase shares of stock, the cost basis is simply the price you paid for each share. Say you purchased 10 shares of XYZ for $100 per share in a taxable brokerage account. The total cost would be $1,000, and your cost basis for each individual share would be $100.

Do you pay taxes on cost basis? ›

Cost basis is used to calculate capital gains tax, which is levied on the difference between the asset's cost basis and current market value. Most brokerages offer cost basis tracking and report any necessary gains and losses to the IRS on Form 1099-B.

What happens if cost basis is not reported to IRS? ›

If you do not report your cost basis to the IRS, the IRS considers your securities to have been sold at a 100% capital gain, which can result in a higher tax liability.

When did the IRS start tracking cost basis? ›

In 2008, Congress enacted mandatory cost basis reporting for brokers and mutual funds. The legislation amended Internal Revenue Code section 1012 (see sections 1012 (a) – (d)) and section 6045 (see section 6045(g)) and added new sections 6045A and 6045B.

How does the IRS know your capital gains on real estate? ›

Transfer the requested information from form 8949 to Schedule D, "Capital Gains and Losses." This form compiles both short- and long-term gains and losses and allows you to reduce the present year's capital gains by a capital loss carryover when applicable. Schedule D reports your total capital gain or loss to the IRS.

Why are some cost basis not reported to IRS? ›

Traders who sell securities purchased prior to the dates listed above may not see cost basis information included on their 1099-B, or it may be incomplete. This doesn't mean the non-covered cost basis isn't reportable; rather, it's not required to be reported by a broker to the IRS.


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