# How to Determine Cost Basis for Stocks

Selling shares of stock leaves you with cash in hand and a capital gain or loss. The amount of cash you end up with, called your net proceeds, equals the sale price minus broker’s commissions. You don’t pay taxes on all of your net proceeds. "Cost basis" is the amount of your investment. Also called tax basis, cost basis is the amount you subtract from the net proceeds of the sale of stock to calculate your capital gain or loss. Cost basis is determined in different ways, depending on how you acquired the shares.

Step 1

Add broker’s commissions, and any other transaction costs paid when you bought the stock, to the purchase price to determine the cost basis. If you sell only some of the shares you own, choose which shares you want to sell. The Internal Revenue Service assumes you first sell the shares you’ve owned the longest. However, the gain on those shares might be much different than the gain on recently purchased shares. To maximize the tax benefits, you can choose the shares you sell. For example, to minimize your taxable gains, you can choose shares that have appreciated the least.

Step 2

Use the market value of stock on the date of the owner’s death when you inherit as the cost basis. This means you will “step up” the original owner’s cost basis to the market price on the date of the owner’s death if the shares have gone up since they were purchased, and you will “step down” the cost basis if the shares have lost value. When an estate is large enough to be subject to estate taxes, the executor may sell the shares and substitute the sale price as the cost basis, for up to six months after the date of death. If the stock has declined during this six-month period, this strategy reduces the amount subject to estate taxes.

Step 3

Determine the cost basis of stock you receive as a gift, by using the cost basis of the original owner if you sell the stock at a higher price. If the stock has declined, use either the original owner’s cost basis or the market value on the date you received the shares, whichever is less.

#### Tip

• Capital gains and losses on inherited stock are always considered long-term by the IRS.
• A stock split does not change your cost basis. However, the cost basis per share must be reallocated. For example, in a 2-for-1 spilt, one share with a cost basis of \$60 becomes two shares, each having a cost basis of \$30.