This is one example of an idea that you should discuss in detail with your tax advisor. I do not give tax advice, nor am I a tax advisor. Family Trust Investment Services and LPL do not give tax advice. This article is for informational use only – talk to your qualified tax advisor for their professional opinion before implementing anything mentioned in this article. Tax rules and regulations are complicated and change frequently.
*take a breath…all of the disclaimers have been stated…proceed*
ME: “Hi Mrs. Rodean, thank you for coming in today. Before we can discuss my recommendations for your account, I need to get the cost basis for each stock that you own. Depending on that information, it could change my hold/sell advice.”
RODEAN: “Ok, for most of them, that is not a problem, but for <ABC> and <XYZ>, I have no earthly idea what I paid for them.”
If you as an investor have been in this situation before, it is not a fun place to be. Essentially you are paralyzed until you find the required cost information and all of the “experts” you ask for help will probably defer to someone else.
Broker says: I cannot give tax advice. Please ask your tax advisor.
CPA says: When was this purchased? I need this info to complete your taxes.
Former Broker says: That transferred in. We didn’t buy it, so I don’t know.
Where do you turn? This is information that is REQUIRED. If the stock is sold, and there is no cost basis provided, than the IRS assumes a ZERO cost basis, which makes the entire amount taxable as a capital gain. Looks like this:
1000 shares sold @ $25/share = $25,000 proceeds
Unknown cost basis
$25,000 capital gain for tax purposes
Although this type of gain is taxed at a lower rate than ordinary income, it still is not a good idea to pay tax on a gain that did not occur. The only way to prove that all of the proceeds are not taxable is to find the cost basis.
Before you undertake this task, call the company and the transfer agent and ask if they can reference a shareholder database sorted by Social Security number. If they can, it will save you some work. If not, read on.
Think of every possible detail about how the stock was acquired and write each piece of information down. Was it purchased, gifted, or inherited? Do you receive statements? Did you EVER receive statements? What firm held the shares for you? Etc, etc…to infinity and beyond.
Opinions vary as to how to determine a lost cost basis, but my CPA used to train IRS agents and is the most knowledgeable tax authority I know, and this is how HE advises clients to do this.
Determine WHEN the stock was purchased. Don’t know? If you inherited it, what was the date of death? If you bought it, take an educated GUESS as to when it was purchased. What else was happening in your life when the stock was purchased…use those as time “landmarks” and take a guess. Try to at LEAST get the year correct.
If you can come up with an exact date, then you have hit paydirt. There are services out there that publish historical stock prices. Look up the closing price as of that date, and make sure you take any splits into consideration. Closing price times # of shares will equal your cost basis.
If you come up with a date range, then this problem becomes solvable. Depending on how exact the date range, finding the answer can be similar to basic mathematics, or the quadratic equation.
Purchased between 6/1/1973 and 6/8/1973? I think I can find your answer. Take the closing price for each trading day and calculate a simple average. Use that average price per share as your number and multiply it times the number of shares you purchased. See below:
- Friday, June 1, 1973 <ABC> closed at 72
- Saturday, June 2, 1973 market closed
- Sunday, June 3, 1973 market closed
- Monday, June 4, 1973 <ABC> closed at 73
- Tuesday, June 5, 1973 <ABC> closed at 74
- Wednesday, June 6, 1973 <ABC> closed at 72
- Thursday, June 7, 1973 <ABC> closed at 74
- Friday, June 8, 1973 <ABC> closed at 75
Simple average: $73.33 per share
Number of shares: 100
Total cost basis: $7,333 (assuming no splits)
This exercise can be done for any date range, but it will be difficult to find someone to help you compile the numbers for a five year range of dates. If you want me to do it, there better be more commas in the account value than decimals. Just saying…
My CPA has always said that the reason his method is valid is that it is the same method the IRS would use if they were trying to prove that your cost basis was incorrect. If they would use this method, why not beat them to the punch?
Once the cost basis is found, provide the information to your advisor and ask them to input the data into their system so that it will show on your account. Once you can see that it shows, the stock is safe to sell….the correct gain/loss will be shown on the 1099 at the end of the year.
So, the next time the CPA, your advisor, and your former advisor play the “it is not my problem, who can we defer to” game, feel free to reference this blog entry and find the long, lost cost basis.