Did you know that, in the event of an IRS audit, the burden of proof for the cost basis of an investment sale you have reported on Schedule D is with the taxpayer. As per T.C. Memo 2003-259, if a taxpayer cannot provide proof of the cost basis of a stock or other investment sold it will be considered to have a "0" cost basis. As a result, the entire gross proceeds will be fully taxable!
It is very very important that you hold onto the "confirmation" slip you receive from your broker for the purchase of an investment for as long as you own that investment, and four (4) years thereafter. You should also save the monthly brokerage account statements that show the initial and subsequent purchases, notices of splits, and any dividend reinvestments for stocks, and the annual year-end account statements that list all the activity for the year for mutual funds for the same period of time.
I would recommend setting up a separate file folder or pocket in an accordion file for each individual investment you own. Start with the paperwork for the initial purchase (i.e. the confirm) and add any appropriate statements and documentation each year. If you invest in a limited partnership put the Form K-1 you receive each year in the file. When you sell all or a part of the investment put the sale confirm in the file and give the file to your preparer at tax time.
The cost basis of an investment you receive as a gift is generally what the person making the gift paid for it. If you receive a gift of stock, a bond or mutual fund shares ask the person giving you the gift for a copy of the purchase confirmation slip for your file. Also make a note of the date you received the gift and place it in the file. If you are gifting an investment to a relative you should give that person, or his/her parents if a minor, a copy of your purchase confirm.
The cost basis of an investment you inherit is the “fair market value” of the investment on the decedent’s date of death. This is the “mean average” price of the investment on that date. It is also the value reported for the investment on the decedent’s federal estate or state inheritance tax re-turn. If you can, get a photocopy of the page of the estate or inheritance tax return that lists the value. If this is not available to you, you can go to www.bigcharts.com and look up the price for the date of death. You will need to know the “ticker symbol” of the investment. Print out the result and put it in your file for the investment. You should also be able to get the information from your broker, or possibly the Executor of the estate.
If you inherit real estate you should also document the date of death fair market value for your re-cords as soon as you can. Again, this value will be in the estate or inheritance tax return and you should be able to get it by contacting the Executor.
It is very very important that you hold onto the "confirmation" slip you receive from your broker for the purchase of an investment for as long as you own that investment, and four (4) years thereafter. You should also save the monthly brokerage account statements that show the initial and subsequent purchases, notices of splits, and any dividend reinvestments for stocks, and the annual year-end account statements that list all the activity for the year for mutual funds for the same period of time.
I would recommend setting up a separate file folder or pocket in an accordion file for each individual investment you own. Start with the paperwork for the initial purchase (i.e. the confirm) and add any appropriate statements and documentation each year. If you invest in a limited partnership put the Form K-1 you receive each year in the file. When you sell all or a part of the investment put the sale confirm in the file and give the file to your preparer at tax time.
The cost basis of an investment you receive as a gift is generally what the person making the gift paid for it. If you receive a gift of stock, a bond or mutual fund shares ask the person giving you the gift for a copy of the purchase confirmation slip for your file. Also make a note of the date you received the gift and place it in the file. If you are gifting an investment to a relative you should give that person, or his/her parents if a minor, a copy of your purchase confirm.
The cost basis of an investment you inherit is the “fair market value” of the investment on the decedent’s date of death. This is the “mean average” price of the investment on that date. It is also the value reported for the investment on the decedent’s federal estate or state inheritance tax re-turn. If you can, get a photocopy of the page of the estate or inheritance tax return that lists the value. If this is not available to you, you can go to www.bigcharts.com and look up the price for the date of death. You will need to know the “ticker symbol” of the investment. Print out the result and put it in your file for the investment. You should also be able to get the information from your broker, or possibly the Executor of the estate.
If you inherit real estate you should also document the date of death fair market value for your re-cords as soon as you can. Again, this value will be in the estate or inheritance tax return and you should be able to get it by contacting the Executor.
Any questions?
TTYL
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