Cost Basis or Tax Basis? Whatever you call it, don't fear it. Figure it.
It's not very sexy, but "basis" is one of the most important words in the lexicon of taxes. Sometimes you see it by itself.
Sometimes it's called "cost basis" or "adjusted basis" or "tax basis." Whatever. Your basis is essentially your investment in an
asset—the amount you will compare to the sale's proceeds to determine your profit or loss when you sell. The higher your basis,
the less gain there is to be taxed… and therefore the lower your tax bill. You can see why it's so important to accurately track the
basis of any investment you own.
Although this sounds like a simple concept, it isn't necessarily so. For one thing, your basis depends on how you get the property
in the first place.
The tax basis of stock you purchase is what you pay for it, plus the commission you pay. Say you buy 100 shares of XYZ Inc. at
$40 a share, and you pay a $100 commission. The total cost is $4,100, and the tax basis of each of your shares is $41. If you
sell the 100 shares for same $40 each, and pay $100 commission on the sale, you have a $200 loss—your $4,100 basis minus
the $3,900 proceeds of the sale.
The basis of securities you receive as a gift depends on whether your ultimate sale of the stock produces a profit or loss. If you
sell for a profit, your basis is the same as the basis of the previous owner. In other words, the basis is transferred along with the
property. If you sell for a loss, though, the basis is either the previous owner's basis or the value of the stock at the time of the
gift, whichever is lower. In other words, you don't get to write off a loss that occurred while the donor owned the securities. Tip: If
you get stock or other assets as a gift, ask your benefactor for his or her basis… and keep it with your records.
When you inherit stock or other property, your basis is usually the value of the asset on the date of death of the previous owner.
Assuming the asset had appreciated, the basis is "stepped up" to market value, so the income tax on any profit that built up
while the previous owner was alive is forgiven. You are responsible only for the tax on appreciation after you inherit the stock. If
the stock price falls before you sell it, you can claim a tax loss. If the stock had lost value while owned by your benefactor, your
basis is "stepped down" to date of death value.
(An exception to the general rule, which applies only when an estate is large enough for a federal estate tax return to be filed,
can set the basis of inherited property at its value six months after the owner died, or when it was sold if during that six month
period. If the executor of the estate chooses that value for estate-tax purposes, it becomes your basis in the stock.)
If you own stock or other assets with a spouse as joint tenants or tenants by the entirety—forms of ownership that insure that on
the death of one co-owner the survivor becomes the sole owner—the basis is adjusted upward on the death of the co-owner.
Basically, the survivor is treated as though he or she inherited half of each share of stock, with its basis increased to current