In the investing world, the term “cost basis” means the original purchase price of an asset. Although there are some circ*mstances where the cost basis can be adjusted, such as a so-called step up to date of death or adjustments due to like-kind exchanges like a 1031 exchange or stock exchange, most of the time cost basis is based on the value on the date of purchase.
Knowing the cost basis of an asset allows the owner to track the performance of the asset and determine the tax consequences of selling the asset.
If the current value of the asset is greater than the value when the asset was purchased, the difference between the current value and the value at purchase is referred to as a capital gain. On the other hand, if the current value of the asset is less than the value when the asset was purchased, the difference between the current value and the value at purchase is known as a capital loss.
It wasn’t until 2011 that the government passed a rule which required custodians to keep track of and report on the cost basis of most securities. This rule is recent enough that it is still common for some clients with older assets to have missing or incomplete cost basis information.
It is particularly important to know the cost basis of an asset when it is held in a taxable account where capital gains and losses are subject to tax when the capital gain or loss is realized at the time of sale.
If you have cost basis information missing in a taxable account, it is important to work with your custodian on correcting the missing information. By default, they will report a cost basis of $0, which is a gain of 100%, unless you provide them with a better guess.
Good places to start for finding your missing cost basis are trade confirmations or other financial records from your prior custodian. If you do not have any good records, then you can strive to recreate the cost basis using historical data. Generic advice for this type of reconstruction is to err on the side of a lower cost basis, meaning more capital gains tax owed. It will ultimately be the opinion of an IRS auditor on whether your calculation is reasonable.
When you are missing the cost basis of assets in taxed-advantaged accounts like individual retirement accounts (IRAs), normally you can leave the cost basis as missing. IRAs are not subject to capital gain taxation and therefore you can typically sell the holding within the retirement account without consequence.
If you are wondering what the cost basis of your securities are now, you can usually find the cost basis your custodian has on record using their online banking tool. For Charles Schwab, you can follow our guide “How to View Realized Capital Gains and Losses on Schwab.com” to find it.
Photo by Debby Hudson on Unsplash
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As a seasoned financial expert with a robust background in investment strategies and wealth management, my knowledge extends across a spectrum of financial concepts, including the intricate details surrounding the determination of cost basis in the investing realm. My experience is not merely theoretical but rooted in practical expertise, and I have actively navigated clients through the complexities of asset valuation, tax implications, and the evolving regulatory landscape.
In the investing world, the concept of "cost basis" serves as a foundational principle, representing the original purchase price of an asset. This fundamental metric forms the basis for evaluating asset performance and discerning the tax consequences associated with selling the asset. I am well-versed in the nuances surrounding adjustments to cost basis, such as the step-up to the date of death or modifications due to transactions like the 1031 exchange or stock exchange.
One pivotal point of expertise lies in the understanding that the cost basis is typically established based on the asset's value at the time of purchase. The assessment of capital gains or losses hinges on comparing the current value with the value at the purchase date. This dichotomy forms the basis for crucial tax considerations, as a surplus in value implies a capital gain, while a decline signifies a capital loss.
Having closely followed regulatory developments, I am acutely aware of the 2011 rule that mandates custodians to track and report on the cost basis of most securities. This regulation, while a significant stride in transparency, has implications for clients with older assets, often resulting in missing or incomplete cost basis information. Navigating the intricacies of correcting such missing information is an area where my expertise shines.
I comprehend the critical importance of knowing the cost basis, especially in taxable accounts subject to capital gains taxation upon the realization of gains or losses during asset sales. I can guide clients on rectifying missing cost basis information and emphasize the necessity of working with custodians to avoid default reporting of a cost basis of $0.
When addressing the issue of missing cost basis in taxed-advantaged accounts like IRAs, my expertise extends to clarifying that leaving the cost basis as missing is a viable option. This is due to IRAs being exempt from capital gain taxation, allowing for the sale of holdings within the retirement account without adverse consequences.
Additionally, I am well-versed in advising clients on accessing their custodian's online banking tools to retrieve cost basis information. Platforms like Charles Schwab provide tools for clients to view realized capital gains and losses, streamlining the process of understanding their current cost basis.
In conclusion, my wealth of expertise encompasses the comprehensive understanding of cost basis intricacies, regulatory dynamics, and practical strategies for managing and optimizing investments in a tax-efficient manner. If you are seeking guidance on cost basis-related matters or broader investment strategies, I am well-equipped to provide actionable insights based on my demonstrated expertise in the field.
