December 2007

One of the most shocking experiences for individual investors can come in April in the year after they have sold an investment.

That’s when they discover they don’t have adequate records of what they paid for their investment and they have to scramble to establish its tax basis in order to avoid overpaying their capital gains tax.

Unfortunately, most stock brokerages and other account custodians do not maintain complete records of an investor’s basis. In some cases, an investment was purchased many years ago through one broker and transferred to other brokers over the years, and the new broker has no idea of the investor’s basis.

If you don’t keep good records of your investments you will have to fill in the tax basis puzzle once you sell them from a non-retirement account.

How it is calculated
When you sell an investment, you only have to pay capital gains tax on any untaxed appreciation. You also can take a capital loss, and save some income tax, if you can establish that the investment at sale was worth less than you paid for it.

To establish basis you need to know the dates and amounts of all purchases, as well as the dates and amounts of any reinvested dividends that were already taxed.

The best evidence includes purchase confirmations and annual statements that list reinvested dividends. You can also find reinvested dividends on copies of your previous income tax returns.

What if you don’t have complete records? Don’t panic, there are numerous sources to turn to. First, if the investment is a mutual fund, call the fund company and see if they can establish basis for you.

Internet resources
The internet is a great help with stocks. Most large companies offer extensive records of their daily stock prices going back many years, as well as information on stock splits that may be necessary in calculating basis.

If your stock was held through a dividend reinvestment plan, contact the plan’s custodian for a basis report.

A private company, Appraise, will research your stock’s basis for a modest fee. You can find it on the internet at www.appraisenj.com.

If you can’t get complete information, make your best estimate and document it. If the IRS audits you they may approve your figures if they were estimated in good faith.