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 Cost Basis

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.

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.

A corporate 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 assistance.

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.

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