If you are an investor you probably have many types of assets that you must keep records for, these include stocks, bonds and mutual funds. When you go to sell these assets your gain or loss is going to be determined by the basis you have in them. Basis is very important in how the IRS is going to view your gain or loss. If your record keeping is not very good it will be hard to prove what your basis is.
What Is Tax Basis?
So what exactly is basis? In most cases your basis will be what you paid for the asset you acquired. This is not always the case though; in some specific situations your basis will be completely different. Some of these specific situations include when your acquire the asset through an inheritance or if your acquire the asset as a gift.
If you acquired the asset through an inheritance your basis in the asset will be either the FMV on the date of death or an alternative valuation date that was chosen by the executor of the estate. This may seem confusing but it is quite simple because it can only be either one. Determining FMV is fairly simple when you are talking about stocks, bonds and mutual funds. It can become trickier if you were to acquire something that did not have an active market price or some kind of comparable asset that was recently sold.
If you acquired the asset as a gift your basis for a gain would be determined by the donor’s basis and if you had a loss your basis would be determined by the fair market value on the date of the gift.
Tax Basis Will Change Over Time
It is important to understand that basis can also change over time for a variety of reasons. Basis is not something that is always the same and this is why it is very important to keep excellent records because you can overstate or understand a gain or loss if you do not.
Some of the reasons your basis may change would include:
Stock Dividends & Stock Splits/Reverse Splits
Broker’s Commissions and Other Costs
Return of Capital
There are an endless amount of things that could happen that would cause your basis to change in an asset you have acquired. Remember to always keep excellent records and you won’t ever have a problem determining your basis.