Definition of Cost Basis
Cost basis is the original amount paid for a security that has
been adjusted for wash sales and corporate actions. Cost basis is
used to determine capital
gains and losses.
A wash sale
is trading activity in which shares of a security are sold at a loss and a
substantially identical security is purchased within 30 days. The subsequent
purchase could occur before or after the security is sold, creating a 61-day
window that must be monitored to identify wash sales. A wash sale will defer
losses (possibly increasing capital gains tax due) and increase the cost basis
of the new tax lot.
action is any material change to a security, including name changes,
stock splits, spin offs, and mergers. In many cases, a corporate action will
result in a new position or a change to the cost basis of the security. The IRS
requires investors to make all the necessary cost basis adjustments for each
security. Each corporate action type has its own rules that investors must
learn if they are to accurately complete their Schedule D forms.
If an investor cannot document when the security was purchased or
how much the security cost, the IRS requires investors to use a cost basis of
$0. However, try to get some information about the position in question
by contacting the broker you purchased the security from or by looking through
old monthly and year end statements to pinpoint a time period when the cost
basis can be estimated. The IRS accepts accurate cost basis estimates as long
as investors can document how they arrived at their conclusion.
How to Estimate Cost Basis
If you have the original trade confirmation for a security you can find the
original cost basis (you may need to adjust the original cost basis to reflect
changes noted earlier). If you can’t find the trade confirmation, find the
first monthly statement that includes the security. It is fairly safe to assume
that you acquired the position during the previous month. Now find the lowest
price at which the security traded during that month (your broker may be able
to help you), and use this price to calculate your original cost basis.
Do not add a commission to this cost basis unless you can prove you paid
one; and check stock listings to figure whether the shares split after that
date. This conservative approach will maximize your gain (and your tax
obligation), which should appease the IRS. Consult a tax advisor for further
If you can determine that you purchased the security at some point
during a given year try to narrow it down to a specific month. If you can
determine that you purchased the security at some point during a given month
try to narrow it down to a specific week. Each time you narrow the timeframe,
the more accurate your estimated cost becomes. This will satisfy IRS
requirements and it benefits you since your cost basis is likely to be close to
what you actually paid for the security.
How GainsKeeper Can Help with Cost Basis
GainsKeeper can help with cost basis calculations. Investors
enter original buy and sell transactions into GainsKeeper. GainsKeeper will
then automatically match sell transactions against appropriate tax lots, and
adjust positions and cost basis for corporate actions and wash sales.
When importing trade information from some brokers, users may
receive baseline positions. These are positions that investors held open at the
time their brokers sent their trade data. In order for GainsKeeper to
accurately calculate gain/loss figures, users need to input their cost basis
and purchase dates for these baseline positions. After this one time
baseline, GainsKeeper will automatically adjust basis and gain/loss for all
trades, wash sales and corporate actions so users will not have to worry about
their cost basis again.