Cost Basis of Securities

 

Now that we are into the new year, it is a time when people start looking forward. Most of this forward focus comes in the form of making positive changes, as shown by the amount of Planet Fitness commercials we are currently being subjected to.

Around here at Davidoff and Associates, though, this pulls in different directions as it is the start of our busiest time of the year as we rapidly hurtle toward mid-April. This is both exciting and sometimes frightening.

As of now, the IRS is not even yet really accepting tax returns until later this month. That does not mean you can’t start to prepare, though, and the sooner you get started, the sooner you stop worrying about making sure that you live up to your responsibilities and the government deadlines.

And that is really a good idea because I believe there is no such thing as an easy tax return. Sure, some are easier, but nothing is really easy when it comes to this world. In fact, some things can even get very complicated, and that is why it is good to have professionals on your side.

For example, have you ever tried to figure out just what ‘cost basis’ means?

Essentially, this is a number that needs to be figured out when a security is sold, and it will determine whether that transaction will result in needing to pay a capital gains tax or if you can take a capital loss.

This could be as simple as the cost of the security when it was purchased, but as I said, things are rarely simple in this world, so many adjustments may need to be made, and just what type of adjustments will depend on the type of security being discussed.

This can get very complicated when speaking of something like a mutual fund that reinvests dividends. The trail there of when and where money went is not easy to retrace without good records.

Now if you are one who often trades in securities, this probably does not sound unfamiliar to you, and you have looked at such things when discussing situations with your financial advisor or with a tax professional when filing past tax returns.  What if this is a rare situation for you, though? What if you have come into ownership of a security through inheritance or donation?

When the securities in question have always been in your possession, then one can at least look back to that original purchase price and have a good starting point. That is not the case when you gain them through these other means, however.

For inherited property, that starting point and basis is changed to the value upon the decedent’s death. This is generally very favorable, for the inheritor then will not have to pay taxes on the gains made during the time the original holder owned the security.

To donate securities, the recipient does not get the above break if the gift is worth more than the original purchase price. In that situation, the recipient will have tax liability going back to the original purchase price. If the gift happens after the original security has lost value, though, the recipient’s basis number will be the value at the time of the gifting.

All that is only the most bare-bones ideas behind the concept, and as stated, there could be further calculations necessary to reach exact numbers. This just goes to show how important it can be to have professionals on your side, especially during this crucial time of year.

So if you don’t see anything in the cost basis column on your 1099-B form that came from your broker or investment advisor, or feel your cost basis as shown may need to be adjusted, please reach out to us and mention this.  We will advise you on steps to be taken to figure out your cost basis properly.

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