How to Calculate Your Cost Basis and Save Money…Guaranteed


When you sell a capital asset you need to know when you purchased it and what the cost basis is.  These will be used to determine what your capital gain (or loss) is.  Capital assets are items such as stocks, bonds and mutual funds.

Holding Period

A short-term capital gain is for a capital asset held a year or less.  Short-term capital gains are taxed as ordinary income.  The highest ordinary income tax rate is 39.6%. Long-term capital gains are for assets held longer than a year.  “Net capital gains” are long-term capital gains greater thatn short-term capital losses resulting in a lower tax rate. These gains may be taxed at 0%, 15% or 20% depending on your income.  Selling collectibles (coins or art) will be taxed at a maximum rate of 28%.

Cost Basis

The cost basis is generally what you paid for something.  If you buy 1,000 shares of the ABC Company at $10 a share, your total cost basis would be $10,000. If you sold these shares for $13,000 the gain would be $3,000.


Additions to Cost Basis

If the dividends or capital gains from a mutual fund are being reinvested this will add to the cost basis. If you have a stock that is on a Dividend Reinvestment Plan (“DRIP”) the result would be similar.  The dividends that are reinvested would be added to the cost basis.


Inherited Assets

If you inherit an asset your cost basis is generally the fair market value (“FMV”) at the date of death.  This is also known as the stepped up value. This value will be disclosed on the probate inventory form that is filed with the local probate court. Inherited assets are treated as long-term capital assets.


Gifted Assets

If you receive an asset as a gift, your cost basis is whatever the basis was for the donor.  This is known as carryover basis. The basis of the donor carries over to the recipient of the gift. You should (gently) request the cost basis from the donor when the gift is made.  It may be much more difficult to obtain this if you are looking for it years later. If the donor makes a gift in 2013 of over $14,000 to one individual in one year they will need to file a Gift Tax Return.  This is done on Form 709, United States Gift (And Generation – Skipping Transfer) Tax Return. The cost basis of this gift will be disclosed on this form along with other pertinent information.


Have you had difficulty calculating your cost basis in the past?

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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