You bought
If you are flustered by missing paperwork, take heart. There are ways to reconstruct purchase prices, and I will outline some of them below.
For newly purchased shares, help is on the way. Congress has mandated that brokers keep purchase data on hand for any stocks bought in 2011 or later. Funds (exchange traded and mutual) will be covered beginning next year. Mandatory bond tracking begins in 2013.
All this may lessen your paperwork headaches down the road, but understand that the purpose of the legislation was not to improve your health. The IRS suspects that taxpayers reporting securities sales have a habit of overstating their purchase costs. The data on costs will be provided to tax collectors as well as to the taxpayers.
Long before these mandates came down, the brokerage industry began tracking cost basis, for a different purpose. By displaying unrealized gains and losses your broker can help you cut your tax bill. You let winners ride and you harvest losses for the tax deductions. More on harvesting here.
Charles Schwab & Co. has been showing its customers their purchase costs since 2005, and has retrofitted the database with trades going back to 1993. If you bought GE at Schwab in 1995 and still hold it there, you know what your cost was.
Fidelity Investments has been tracking costs for brokerage customers since 2000 and has backfilled data going back to 1988.
Both of these firms give you a tax optimizer for use when you have accumulated a position over time and now want to sell just a portion of it. Usually what you want to do is specify that the highest-cost shares are the ones you’re selling. That lowers your gain, or increases your loss deduction, as the case may be.
What about the really old trades? There are services that can track down old prices and make all the necessary splits and other adjustments. One of these is Netbasis, offered by the Phoenix, Ariz. firm NetWorth Services.
Your grandmother, let us fantasize, picked up 100 shares of
The meticulous report from Netbasis includes such fine points as the fractional share of Columbia Pictures you picked up along the way, and the 21-cent capital gain you would have had on that share when it was cashed out in 1988.
But the big money is in the co*ke. Before you sell, you’d want to take note of the unrealized gain on Granny’s round lot, which Netbasis duly reports as $53 million.
I took a quick tour of the Netbasis data set and came away impressed with its breadth. Several holes that I cited in an earlier version of this post have been filled.
Nico Willis, the 46-year-old former stockbroker who founded NetWorth in 1997, has a patent on basis adjustment algorithms. His Web site boasts that Netbasis data was used in a seminal 2005 study by the IRS of basis chiseling. (Say, wouldn’t it be nice if he were strictly on our side?)
Those algorithms pay off particularly well in reorganizations. Anyone who had a stake in the pre-1984 AT&T and still owns some or all of the pieces has a basis allocation nightmare on his hands. Netbasis takes care of it.
If you are missing a cost figure and the amount at stake is large, the $15 discounted fee for a report from Netbasis may be a good investment. Another option: buy a premium version of H&R Block At Home, which will give you unlimited access to the price database.
But before you buy any software, and certainly before you sell any stocks, contemplate all these ways of contending with cost basis:
If you have a gain, hang in there. You don’t owe tax until you sell, so don’t sell unless there’s a compelling reason. And if you never sell, you never have to tell the IRS what your cost was.
Remember that appreciation gets a permanent reprieve from income tax when the security in question is either given to charity or left in an estate. The latter phenomenon is known as step-up. If you haven’t heard of that, take a side trip to this primer on capital gains and losses.
See if it matters. No sense sweating over whether your cost was $2 a share or $3 if you only own 100 shares. In some cases you can just put $0 down as the cost—the IRS can’t object to that—and suffer no consequences.
Couples filing joint returns with taxable income below $68,000 get a 0% rate on long-term gains. Kids can have up to $1,900 of investment income before that income gets taxed at parental rates. If you have a $1,500 stock position of unknown cost that you want to get rid of, give it to your four-year-old and ask her if she’s interested in selling it.
Go to a library. Many big city libraries can give you free access to an archive like ProQuest, which has electronic copies of old Wall Street Journals, which have stock tables.
Check the Investor Relations department. Most public companies have a Web section with this rubric. It may have all the split history or other adjustments you need to reconstruct a basis.
Example: Aunt Mildred bought shares of Standard Oil (N.J.) on April 1, 1960 and later gave them to you. You now have 1,600 shares of Exxon Mobil. The Exxon Web site tells you about splits totaling 32-for-1 in the interim. So Mildred must have bought 50 shares. You fetch the old price of $41.50. Your cost basis is $2,075 plus her brokerage commission.
Why is Mildred’s basis your basis? Revisit that primer.
Construct an archive. If you still have positions dating to pre-electronic days, paw through your old brokerage statements while you can still find them and put the confirms in a safe place.
Backfill. If your brokerage statement makes note of “missing” costs, supply them. The data will help you trade intelligently and will speed up tax return preparation.
Customer-supplied cost data is not sent to the IRS and is of no probative value; you’ll still need documentation if you get challenged in an audit.
Capture data before switching brokers. The new broker will pick up your assets but not purchase prices before 2011. Download cost data before moving.
If you must, estimate. Suppose you know you bought Norfolk & Western in 1981 but you don’t know exactly when. It would be safe to use the low for the year as your cost. You might be able to pinpoint a year but not a date if, for example, you have old tax records that show railroad dividends in 1981 but not 1980.
Be careful with bonds. They can get kinky.
Example 1: A company gets into trouble and you buy $100,000 of its bonds for $92,000. The bonds pay off at par. The cost basis that goes on Schedule D is not $92,000 but $100,000. The $8,000 gain is “interest income.” Totally unfair, but don’t get me started.
Example 2: You buy an inflation-protected bond for $100,000. The inflation adjustment raises your principal amount to $103,000. You pay tax on $3,000 of mythical interest. You sell the thing for $104,000. Fidelity accurately reports your capital gain as $1,000. Brokers with outdated software tell you the capital gain is $4,000. For bonds bought after Jan. 1, 2013, though, all brokers should report accurate adjusted costs.
Note: I own or owned some of the securities mentioned in this article.
