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At a very fundamental level, the cost basis of an investment is the total amount invested into the company plus commissions and other costs involved in the purchase. Cost basis is used to calculate capital gains when stocks are sold and is of prime importance for federal income taxation purposes. Cost basis calculation can be most complicated, however, due to the many adjustments for stock splits, mergers, dividends and capital distribution changes that occur in the financial markets. Moreover, there are so many other factors and different situations that go into determining the stock cost basis of shares held by an investor. For instance, shares may be received as a gift or as an inheritance, additional shares of a particular company may be acquired when the market value goes down, dividends may be reinvested. All these different situations will affect cost basis and make its computation not quite so simple. Cost basis reporting and the related requirements became law by the Economic Stabilization Act of 2008 and are being phased in through the IRS. The regulations that have come into effect since 2011 for stocks (for mutual funds from 2012 and for fixed income and options from 2013) have made it mandatory for brokerage firms and dealers to track their clients’ cost basis closely. So in future, cost basis calculation for shares purchased in 2011 and thereafter would pose less of a challenge. But for shares that have been purchased much earlier and which have been subjected to corporate events and adjustments and for those that are gifted or inherited where the investor has no information as to when and how they were purchased, calculation of cost basis becomes a daunting task! An Easy Solution In this age of technology, one does not have to look far or long for answers. These come to us at the click of a mouse! There are web-based services that can help investors find the cost basis on investments rapidly and efficiently. These services are able to track prices of really old trades and make all the necessary adjustments for splits, etc. But some of these tools are geared for particular calculations of cost basis and they require some information from the investor which includes the date the stock was purchased. Without this kind of information, it is unable to perform the calculations. Some brokerages, even before it had become mandatory, had begun tracking cost basis to help their customers cut down on their tax bills. They provided their clients with a tax optimiser to help the client decide which shares to sell in respect of a stock that has been accumulated over a long period. There are several companies that offer cost basis solutions. Their applications are very user friendly with great customer support. With cost basis software some of the most complex calculations with respect to gifting, wash sales, fair market value, non-covered and compensation related equity shares can be done in a matter of seconds. Among the software database firms that are foremost in this field is NetWorthServices, Phoenix, Ariz. and its web tool, Netbasis which has been consistently upgraded and innovative features added to make it the most widely sought-after application in the field of cost basis calculations. NetWorth has been the recipient of several awards recently for the excellent performance by Netbasis. One of its powerful features is its power search which permits unwinding of a security back to the original purchase date. It permits an investor to input initial acquisition date and values from a current statement to calculating cost basis. It is pretty obvious then that the best thing for investors, especially those who have purchased securities a long time ago, is to opt for a cost basis software solution like the one referred to above.
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cost basis calculation, capital gains taxes,
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