Determining Basis for Your Mutual Funds and Stock Sales

If you take money out of a mutual fund or stock account after you’ve sold the funds or the accounts, how do you know what to pay for taxes? Usually, your statement will show what you paid for the stock, what the fees to buy and sell were, and what you sold the stock for; your profit or loss will be calculated for you based on the basis of the stock price you paid. However, if you changed accounts, your basis might be gone or wrong, and that could result in your reporting a profit that you didn’t actually earn paying taxes you don’t actually owe. What should you do?

This situation is frustrating – we have investments from the 1980’s and 1990’s and I dread having to figure out the cost basis for them myself. I’ve got records in plastic bins in the attic…but lack the initiative and time to figure it all out. I’m thinking that if possible we’ll just hold on to the stuff until we die and then the kids can use fair market value on the date of death of whoever dies last – me or my husband – and then problem solved!

What is Cost Basis?

Let me first explain cost basis and why it matters. When you buy stocks, mutual funds, real estate – really pretty much anything – you pay some amount for your purchase. You may also pay taxes, fees, and other charges that add to the cost. That total is your cost basis or just basis. So if you buy 100 shares of a stock for $25, and it costs you $10 to buy it and $10 to sell it, your cost basis is 100 share x $25 or $2,500 plus $10 and $10 for the sales fees for a total of $2,520. You don’t have to pay any income or capital gains tax on stock or mutual fund shares when you buy them or during the time you hold them, even if they go up during that period. However, when you go to sell them, you have to pay income or capital gains tax on the profit you make.

Continuing the example above, if you sell those 100 shares of stock for $50, you would make $5,000. If you subtract the original cost of $2,520 (the $2,500 to buy the stock plus the fees) that’s a profit of $2,480, which is most likely taxable profit unless these shares are in a tax-deferred retirement account like an IRA or 401(k). If you sell those 100 shares for $10, you’d have a loss of $1,520 ($1,000 sales price + the $20 - $2,500 basis) that, depending on circumstances may be able to reduce your personal taxable income by up to $3,000 that year.

Do I Only Owe Taxes When I Sell Stock?