When you sell stocks or bonds, you'll make a profit or take a loss. If you make a profit, you'll owe income tax on your capital gain. But before you know how much tax you owe, you first have to figure the security's "cost basis." Cost basis is the original value of a security, which typically represents its purchase price plus other costs you paid (such as commissions and fees) and any adjustments such as dividends and stock splits. If you're missing this pertinent information, start with the security's purchase date (or estimated purchase date) and work with your broker or through an online securities data retrieval service to fill in the blanks.
Marketwatch.com and Nasdaq.com are two online sources that list historical security prices.
Understanding Taxation Rules
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.
Determining the Purchase Date
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.
Finding the Correct Price
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.
Paying the Appropriate 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.
Herb Kirchhoff has more than three decades of hands-on experience as an avid garden hobbyist and home handyman. Since retiring from the news business in 2008, Kirchhoff takes care of a 12-acre rural Michigan lakefront property and applies his experience to his vegetable and flower gardens and home repair and renovation projects.