Tax Basis for Stocks Acquired in a Series
The Internal Revenue Service treats corporate stock investments as capital assets. Whenever you sell shares of stock, the resulting gain or loss is reportable on your tax return. Calculating the gain or loss initially requires that you identify the tax basis of each share sold. However, when you buy the same stocks in a series -- meaning you acquire them at different prices and at various times -- the IRS requires you to calculate basis in a very specific way.
Stock Basis Overview
The way you calculate tax basis for stocks is the same whether you acquire the portfolio in a single trade or acquire them in a series over time. A stock's tax basis equals its market price plus the commissions you paid a broker for executing the trade. Essentially, this sum represents your total acquisition cost. However, the commissions you pay when you sell stock don't increase tax basis. Instead, these sales expenses reduce the capital gain (or increase the capital loss) that you calculate on Form 8949, which the IRS requires along with Schedule D when you file your taxes.
Stocks Acquired In Series
When selling some of the stock you acquired in a series, it's sometimes impossible to identify the specific shares sold. As a result, the IRS requires you to use a first-in-first-out, or FIFO, approach. When calculating capital gains and losses, you use the tax basis for the older acquisitions first.
Basis Calculation Example
To illustrate how this works, suppose you acquired 300 shares of Microsoft through three 100-share trades: April 1, 2009 at $19 a share; Oct. 1, 2009 for $25; and March 1, 2010 for $29. Each trade had a $10 broker commission. If you sold 140 shares July 25, 2012 for $29 per share, you'd report a tax basis of $2,914 for those 140 shares on Form 8949. Pursuant to the FIFO method, this $2,914 reflects the $1,910 of tax basis for the lot acquired April 1 ($1,900 market price + $10 broker fee) and $1,004 for 40 of the 100 shares acquired Oct. 1 ($1,000 market price + $4 for 40 percent of the broker fee).
Calculating Capital Gain
To calculate your capital gain on the sale, you subtract the total tax basis of $2,914 from the gross proceeds of $4,060 ($29 per share x 140 shares), which results in a gain of $1,146. However, if your broker charged $25 to sell the shares, you subtract this amount from the $1,146 to arrive at a total capital gain of $1,121 for the transaction. Your gain is taxed at the lower long-term capital gains rates because your holding period for the 140 shares is more than one year. Had the shares been held for one year or less, the IRS would have taxed the gain using short-term rates -- the same rates that apply to most other types of income, such as employment and interest earnings.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.