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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 need to know the cost basis for that investment.
For stocks or bonds, the cost basis is generally the price you paid to purchase the securities, including purchases made by reinvestment of dividends or capital gains distributions, plus 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 you after you have purchased a security.
You -- the taxpayer -- are responsible for reporting your cost-basis information accurately to the IRS. You do this, in most cases, by filling out Form 8949. (For tax history junkies, this form replaced the Form 1040 Schedule D-1 in taxable year 2011 for most cost-basis reporting.)
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You're not totally on your own when it comes to computing cost basis. In 2008, Congress passed a law that requires brokerage firms, mutual funds, and others to give you a hand.
In its Cost Basis Reporting FAQs, the IRS lays out what cost-basis reporting must be provided by brokerage firms and other financial institutions. Currently, brokerage firms must report cost basis and the type of capital gain (short-term or long-term) on Form 1099-B, or a substitute statement, for the sale of the following types of securities:
Investors should receive a copy of any 1099-B or substitute statement from their brokerage firms by Feb.15. Review this information 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 differences you find.
Investors should be aware that there are situations in which a firm may not be required -- or is simply unable -- to provide a cost basis for a sale. This could be the case if the securities you sold were purchased many years ago, or if you transferred your holdings from one securities firm to another prior to the new reporting requirements.
If you have questions about what sales are reportable by your brokerage firm, you shouldn't hesitate to contact your financial professional. Many firms also have a section on their websites explaining cost basis, and the specific cost-basis information they provide to their customers.
While brokerages have cost-basis reporting obligations, it's still important to keep good records of your transactions. Follow these tips:
IRS Publication 550 offers detailed guidance on how to calculate cost basis under different circumstances. It's also a sound practice to consult with a tax professional when computing and reporting a gain or loss.
The bottom line is that 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.
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