If you hold stocks or bonds that you want to sell, you must know the cost basis for the securities in order to figure your taxable gain. But if you lost your purchase records or inherited the stocks and bonds, you may have no idea of the securities’ cost basis. That’s not a good position to be in.
The investment principal you recover through sale of your securities isn’t taxed, only the gain. But if you do not know what the investment principal was, you cannot provide a cost basis for the securities you sold. In that case, the Internal Revenue Service will assume that 100 percent of the sale proceeds is a taxable capital gain. This means you will pay tax on the principal originally invested in the stocks and bonds as well as on the investment gains.
To find an unknown cost basis for stocks and bonds, you first must determine the purchase date. Look for any purchase-related records you might have, such as brokerage statements or receipts. If no purchase records exist, take an educated guess about when you might have bought the securities based on life events happening when they were purchased. If you inherited the stocks or bonds, find the date of death. If the stocks were a gift, work with the giver to find the date they were given to you. If you can’t get an exact date, go for a range of dates or at least an acquisition year.
Once you have an acquisition date, consult your accountant or broker, or go online to fee-based services or free services that provide historical stock and bond prices to find the price as of that date. The investor relations unit of the entity issuing your securities may have historical price information. Ask the transfer agent or trustee if it can track your transactions by your Social Security number. If you have a range of possible purchase dates, find the average price of your stock or bond during the date range. If you only have a purchase year, find the average price during that year. Once the cost basis is in your portfolio record, sell the securities.
Pay the Tax
If yours is a small investment holding and you would have to spend much time and money to arrive at a cost basis, you may want to consider simply paying capital gains tax as if your securities’ cost basis was zero. The capital gains rate normally is much less than the tax rate on ordinary income. For instance, if you sold stock for $1,000, had no cost basis and your capital gains tax rate was 15 percent, your tax would only be $150.
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