- August 13, 2024
- Posted by: Gavtax
- Categories: Funding trends, U.S Taxes and Businesses
Calculating the basis of securities is crucial for determining capital gains or losses when you sell them. The basis is generally the original cost of the securities, but other factors can affect it. Here’s a comprehensive guide on how to calculate the basis and the various types of basis beyond just cost:
1. Cost Basis
The cost basis of a security is the original purchase price plus any associated costs such as commissions and fees.
Example:
(a) Purchase Price: $1,000
(b) Commission: $10
(c) Cost Basis: $1,000 + $10 = $1,010
2. Adjusted Basis
The adjusted basis is the cost basis adjusted for various factors like stock splits, dividends, and return of capital.
Adjustments Include:
(a) Stock Splits: If your stock splits, the basis per share is adjusted.
(b) Dividends: Certain dividends may require adjustments to your basis.
(c) Return of Capital: If you receive a return of capital distribution, it reduces your basis.
Example:
(a) Cost Basis: $1,010
(b) Return of Capital: $50
(c) Adjusted Basis: $1,010 – $50 = $960
3. Inherited Basis
When you inherit securities, the basis is generally the fair market value (FMV) at the date of the decedent’s death.
Example:
(a) FMV at Death: $1,200
(b) Inherited Basis: $1,200
4. Gifted Basis
If you receive securities as a gift, your basis is typically the donor’s adjusted basis at the time of the gift.
Example:
(a) Donor’s Adjusted Basis: $800
(b) Gifted Basis: $800
5. Basis for Shares from Reinvested Dividends
When dividends are reinvested to purchase additional shares, each purchase creates a new basis for those shares.
Example:
(a) Reinvestment 1: $50
(b) Reinvestment 2: $55
(c) Reinvestment 3: $60
(d) Total Basis for New Shares: $50 + $55 + $60 = $165
6. Basis in a Wash Sale
If you sell a security at a loss and repurchase a substantially identical security within 30 days, the loss is disallowed, and the disallowed loss is added to the basis of the repurchased security.
Example:
(a) Original Purchase: $1,000
(b) Sale Price: $900
(c) Disallowed Loss: $100
(d) Repurchase Price: $950
(e) New Basis: $950 + $100 = $1,050
7. Specific Identification
When selling a portion of your holdings, you can choose which specific shares to sell, which allows you to control the basis of the shares sold.
Example:
(a) Purchase 1: 10 shares at $50 each
(b) Purchase 2: 10 shares at $60 each
(c) Choosing to Sell Shares from Purchase 1: Basis = 10 x $50 = $500
8. FIFO (First-In, First-Out)
This method assumes you sell the earliest purchased shares first.
Example:
(a) Purchase 1: 10 shares at $50 each
(b) Purchase 2: 10 shares at $60 each
(c) Selling 10 Shares: Basis = 10 x $50 = $500
Understanding and accurately calculating the basis of your securities is essential for tax purposes. While the cost basis is the most common, other types of basis adjustments like inherited basis, gifted basis, and adjustments for wash sales, stock splits, and dividends are also important. For complex situations, consulting with a tax professional or financial advisor can ensure accurate calculations.