How to Proceed When You Sell Stock Acquired or Inherited Many Years Ago and You Need to Know Its Tax Basis
You decide to sell securities (“stock”) that you acquired 20 years ago or inherited from a deceased family member. Perhaps you participated in a dividend reinvestment program (DRIP) or moved your stock from one brokerage company to another.
When you sell the stock, the brokerage firm reports the sales proceeds to the IRS. You provide the brokerage statement to your tax professional so that the sale is properly reported to the IRS.
Your tax preparer calls you and informs you that “The brokerage statement you sent me only shows the sales proceeds. There is no cost basis shown on the statement. Please provide me with your tax basis.” If you reply that you do not know your basis, the tax professional will very likely say “In such cases, the tax rules require that I show a zero basis for this stock which means that you will report the sales proceeds as your gain. This could result in you overpaying your income taxes. You really should try to substantiate your basis.”
Steps You Can Take to Establish Your Tax Basi
Ask the tax preparer to compute your tax basis:
This is likely going to be the most expensive alternative. First, you will need to spend time educating your tax professional as to how and when you acquired the stock. Then the tax professional will need to create worksheets showing the date acquired, number of shares acquired, how acquired, and much more. Sometimes the preparer will need to work backwards by starting with the number of shares sold, then working with the company’s website or transfer agent, looking for DRIP dividends, stock splits, stock dividends, mergers, etc. to work back to the year that the stock was purchased. This can be a very time-consuming process which is why it can be expensive.
The preparer will also likely inform you that he does not have the time to do this during the busy season and this project will need to be completed after April 15. He will need to file an extension and suggest that you pay the estimated tax based on the total sales proceeds by April 15 to avoid late payment penalties.
You compute your tax basis:
If you participated in a DRIP program, contact the transfer agent for the DRIP stock and request that it send you the history of your stock transactions. The summary will show the dates that dividends were paid, number of shares purchased, and the value of those dividends which become your cost basis since the dividends are reported as taxable income on Form 1099-DIV.
Check the Internet for websites that provide historical information about stocks. One such site is Wolter Kluwers Capital Changes. This site offers more than 100 years of data and a wealth of detail. It includes corporate actions that will significantly reduce the time spent on your analysis. It reflects historical events such as mergers and acquisitions, spin-offs, exchange offers and reorganizations. Its website says “Subscribers can work backwards to obtain the information needed to adjust a security’s basis or accurately track a corporation’s history. Our historical data, tax analysis and concise summaries of corporate actions provide you with the necessary information to understand the corporate actions as well as the tax consequences of such actions.”
Create a detailed worksheet showing the date of acquisition, number of shares acquired, cost on date of acquisition, and then update the worksheet for any changes to the number of shares you own showing the date of the event, the cause of the event, and the basis of the shares related to that event. Be sure to maintain any third-party support you used to determine your basis.
Tax Planning Tip #1:
There is no time like the present. Carefully look at your monthly brokerage statements when received. Whereas the statements always show the fair market value of the stocks you own, they sometimes also show the tax basis (cost). If the tax basis is not shown, do not wait until you sell the stock to compute your tax basis. You should compute the basis immediately and provide it to your broker for inclusion in the next monthly statement.
If audited by the IRS, the IRS should accept the cost basis shown on the brokerage statement.
Tax Planning Tip #2:
If you acquire stock by gift, immediately determine the stock’s basis. Your basis is the same as the donor’s basis. Therefore, when thanking the donor for their generous gift, ask that person what their basis is. Document that basis in your permanent tax records file and provide that basis to your broker so it is reflected on your brokerage statements.
Tax Planning Tip #3:
If you acquire stock by inheritance, immediately determine the stock’s basis. Your basis is usually the fair market value (FMV) of the stock on date of death. The decedent’s estate will have likely determined the FMV if an estate or inheritance tax return was prepared. If you did not receive a copy of those returns or the basis of the stock was not provided to you, contact the executor/administrator of the estate to obtain your tax basis in the shares inherited. Provide that basis to your broker so it is reflected on your brokerage statements
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.
About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.