Following the post-COVID stimulus hangover in 2022, the bull market has continued to run. One of the key factors was the Federal Reserve’s decision to
Understanding the Terms: All About That Basis
Published Date : July 29, 2024
While you are probably familiar with the term cost basis, it is not likely something you think about very often. In fact, you may only think about cost basis information when asked for it by your Sand Hill Wealth Manager or CPA. Cost basis—also known as tax basis—is necessary to determine the capital gain or loss when a particular asset is sold. It is important that this information is accurate, and the easiest way to do that is to be aware of how it’s calculated.
Cost Basis of a Stock Investment: In the simplest terms, the cost basis of a purchased security is the price including commission. This will adjust over time if there are additional shares purchased, stock splits, dividend reinvestment or return of capital. Since 2011, brokerage firms have been required to retain cost basis data and report it to the IRS on securities sold in a given year. Clients receive the report as well, helping with the record-keeping burden going forward. What brokerages are not required to report is the cost basis of “non-covered” stocks—ones purchased before 2011. The responsibility to provide that information on such investments is squarely on the investor.
Cost Basis of Gifted Securities: It is often tricky for clients to remember that the cost basis of a stock gift is the cost basis of the original holder. If your grandfather gave you a stock gift during his lifetime, his cost basis is transferred to you and becomes your basis in the stock. As you can imagine, it is challenging if not impossible to go back and retrieve this information if many years have passed since the gift was received. For that reason, it is important to get the cost basis when the gift is received if you are the recipient and to provide it if you are making a stock gift.
Cost Basis of Inherited Assets: Inheritance basis is typically, but not always, determined as of the date of death. This adjustment of basis on an appreciated asset to current market value is called a “step-up” in basis. If you inherited stock from your dad at his death, you could pretty easily determine the basis using the historical price information on Yahoo Finance. However, if your dad died 20 years ago and there have been stock splits and re-invested dividends in that time, it becomes a much bigger research project. If you inherit a home or other assets, the basis step-up may also apply here, but again not always. The cost basis of assets in a bypass trust will receive no further basis step-up at the second death. Be sure to check with your estate planning attorney if you are unsure which assets are eligible for a step-up in basis.
What if you just don’t have the basis information for a particular asset? One solution is to think about using that asset for charitable giving. Qualified charities don’t have to worry about cost basis, which means you don’t have to either. Although not ideal, another option is simply to estimate the value of the missing basis. If you are fairly certain you bought your shares of Apple in 1995, but don’t know the exact day, you could use the low for the year as a conservative estimate. Your CPA can also offer guidance on basis reconstruction.
If you are now wondering about the potential for missing basis and basis step-ups in your own financial life, call your Sand Hill Wealth Manager as they are happy to help.
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Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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