When you sell stocks and pay taxes on your capital gains, you'll have to figure out your cost basis. This is the amount you paid for the stock when you first purchased it -- modified for stock splits, dividends and capital distributions. This is a fairly straightforward calculation if you have a record of your purchases. On the other hand, if your company buys the stocks for you, the stocks are considered a form of compensation. Figuring the cost basis on these stocks can get more complex.
Calculating Regular Cost Basis
Calculating your cost basis is easy if you purchased the stock all at one time and it’s publicly traded. Just go back to that purchase date and see what you paid for the stock. You can add any commissions you paid into the cost basis of the stock. For example, if you paid $5,000 for 100 shares of stock, your cost basis is $50 per share plus any commissions. If you paid $100 in commissions for the trade, you divide the commission payment by 100, showing that you paid an extra dollar per share for commissions. Therefore, your cost basis -- including commission, is $51 per share. If you purchased the stock over time, you’ll have to average out the purchase prices to get your cost basis.
Company-Purchased Stock Taxes
Since the Internal Revenue Services considers company-purchased stock as compensation, you'll have to report it and pay taxes on it in the year you receive it. You can put this off if there's a considerable risk of you losing the stock -- meaning the stock is not vested, or owned by you. You pay taxes on the stock as ordinary income the year it vests. If you sell the stock later at a higher price, you'll also have to pay a long-term capital gains tax on the appreciation of the stock.
Calculating Company Cost Basis
If you receive 1,000 shares of company stock in Year One and it is valued at $50 per share when it vests in Year Five, the cost basis is $50 a share or $50,000. You pay ordinary income taxes on the $50,000 in Year Five. If you sell it five years later for $75,000, you have a capital gain of $25,000. To figure out your capital gains tax, you subtract your cost basis -- the fair market value when the stock vested in Year Five -- from the price you sold the stock for, or $75 a share in Year 10. You pay the long-term capital gain tax on the $25,000 increase in value from Year Five to Year 10.
Basis on Private Stock
The cost basis for privately held or closely held stock is more complicated to determine. Typically, the fair market value of the stock is based on an internal formula the company uses to value its stock. The company bases this valuation formula on some element of profitability, asset value or book value. If a formula is not in place, the stock will likely be valued based on the most recent arms-length sale of the stock or a fair market value determined by an independent valuation expert.
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