Little did “Ivan” know that it would have been a good idea to record the cost bases (the original prices) of the five stocks his grandparents gave him 20 years ago, along with the cost bases of the dividends he reinvested in those stocks after receiving the gift.
Now that Ivan’s thinking of selling those stocks, the cost bases (showing up as all zeros on his brokerage statements) need to be researched and updated for tax purposes.
Why? To figure out capital gains taxes when the stocks are sold.
How? That’s the tough part. If you are in Ivan’s position, you’re pretty much on your own. It will be up to you to do some digging. You’ll need to go back in time to two periods, before and after the gift was made.
Step one is to confirm the number of shares of each stock received at the time of the gift.
Step two is to find out what the donor paid for the stock. In Ivan’s case, that’s the dollar amount his grandparents paid for each stock.
If Ivan’s grandparents filed a gift tax return at the time, there is your answer -- in the gift tax return you would find the basis, the number of shares and the date of the gift.
If there is no gift tax return, more is involved. The task at hand is to find the price paid by Ivan’s grandparents (the “carryover” basis). Things would be easier if the cost were based on the day that Ivan received the stocks, but that’s not good enough.
If Ivan can’t come up with this figure after doing research, the most conservative approach is to assume they paid nothing -- a zero cost basis. However, that’s taking an extreme position; zero is not the real cost basis, and taking that approach will trigger the highest tax liability.
Here is an example: Assume Ivan received 1,000 shares of stock A; he sells the stock for $100,000 ($100 a share). If we assume a zero cost (which you would not normally do), his gain would be $100,000.
On the other hand, if Ivan can demonstrate that his grandparents bought stock A for, say, $50 a share, his gain on the same 1,000 shares would be $50 a share, or $50,000.
If you are in Ivan’s situation, reach out to your accountant or tax adviser to help you design a way to be an efficient detective. The goal is to find the original cost or to build a case, with evidence, that supports a dollar figure that best represents the grandparents’ cost.
Now, let’s turn to additional shares Ivan purchased through dividend reinvestments.
Going back to stock A, assume that Ivan now has 250 additional shares above and beyond the original 1,000-share gift. He acquired these additional shares at different prices by reinvesting dividends when they were paid each calendar quarter over a 20-year period.
If the dividend reinvestments were done through a dividend reinvestment plan, the transfer agent for the stock will have a record. If the shares were deposited into a brokerage account, there may or may not be a record. Brokerage firms are now required to report purchase prices after 2011.
In any event, there is work to be done. Tax advisers will do their best to help guide your search. The scope of the search will depend on the amount of a potential gain. In de minimis (minimal) cases, you’ll do the best you can. When large dollar amounts are involved, you’ll have to weigh the cost of hiring professional help to figure out the cost bases.
You may be thinking, how can I avoid this fate if I receive a gift of stock? That’s easy. Keep good records.
This is the advice offered by Vanguard, one of the world’s largest investment management companies:
“An investor should always keep copies of statements and confirmations to accurately calculate cost basis. If reinvesting dividends and capital gains, keeping good records is especially important.”
For more information, read the IRS FAQs on cost basis, reinvested dividends and dividend reinvestment plans (tinyurl.com/yayqctbr).
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org). Please visit www.juliejason.com.
DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION