Your Taxes: Cost-Basis Basics

Selling an investment usually has tax consequences. Here's what you need to know.

Mar 29, 2014 at 3:45PM

Selling an investment typically has tax consequences. To figure out whether you need to report a gain -- or can claim a loss -- after you sell, you must start with the cost basis for that investment. For stocks or bonds, the cost basis is generally the price you paid to purchase the securities plus any other costs such as the commission or other fees you may have paid to complete the transaction. You usually get this information on the confirmation statement that the broker sends after you have purchased a security.

The Internal Revenue Service expects an investor who has sold securities to report his or her cost basis accurately. In 2008, Congress passed a law that requires brokerage firms, mutual funds, and others to report cost-basis information to both investors and the IRS on Form 1099-B when you sell:

  • Shares of stock you acquired on or after Jan. 1, 2011;
  • Shares of stock in a regulated investment company or dividend reinvestment plan you acquired on or after Jan. 1, 2012.
  • Options, fixed-income securities, and other securities as determined by the IRS you acquired on or after Jan. 1, 2014.

The IRS provides more information about how this process works in its Instructions to Form 1099-B. If you sold securities, you should receive a copy of the 1099 filing by Feb. 15. Review the cost-basis information on your filing as soon as you get it. Check that the amount of cost basis your broker reports to the IRS matches your own records -- and if the amounts differ, contact the broker immediately to discuss any errors you find.

Top tip: Keep good records
Keeping good records of your securities transactions is important to accurate cost-basis reporting:

  • Hold on to trade confirmations that show how much you paid for specific shares, or keep track of that information with your own records at home.
  • Keep track of stock dividends or non-dividend distributions you receive, because they may affect the cost basis of your shares.

If you purchased stock of the same company at different times and prices, and can adequately identify which shares you sold, their basis is the cost for those specific shares. If you can't determine exactly which shares you are selling, tax rules will require you to calculate a gain or loss as if you're selling the earliest acquired shares. If you received the stock as a gift or through an inheritance, you may have to find the fair market value when it was given to you or the previous owner's adjusted basis.

The IRS expects you to keep and maintain records that identify the cost basis of your securities. If you don't have adequate records, you may have to rely on the cost basis that your broker reports -- or you may be required to treat the cost basis as zero. For this reason, you may want to check whether you have cost basis information for any securities you want to sell before you do so. IRS Publication 550: Investment Income and Expenses offers detailed guidance on how to calculate cost basis under different circumstances.

For more information about investing, go to

FINRA is the largest independent regulator for all securities firms doing business in the United States. Our chief role is to protect investors by maintaining the fairness of the U.S. capital markets. FINRA does not endorse, sponsor, or guarantee, nor is it sponsored by, any advertisers on this site, and any dealings with those advertisers are solely between you and the advertisers.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information