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January 26, 2007 10:51 AM

Calculating cost basis for stocks I sold last year -- how much proof does the IRS want?

I bought a handful of stocks back somewhere around 2003.

I switched brokers in February, 2004, moving whole shares and selling partial shares.

I sold them all (for this) in 2006, and now I've gotta pay capital gains taxes.

I don't have the statements from my old broker (and neither does their website, anymore), so the closest I can *prove* is that I had them in 2/2004, when I moved them to the new broker. But they were transferred, so that doesn't show what they were purchased for originally.

Can I just say that I purchased them in February of that year and use a historical quote service to pick the lowest-trading day? Clearly, I can prove I owned them in that month. But I can see how the IRS would think, "Sure, you conveniently lost the statements showing that you bought them in 2003, when the market was lower!"

What's the best thing to do here?

posted by electric_counterpoint to work & money (9 comments total)

The best thing is to ask an accountant.
posted by dirtynumbangelboy at 11:06 AM on January 26, 2007

You are much better off estimating than intentionally lying. If you say 2004 and they audit you, are you going to produce your February statement and then lie and say you bought them at the other brokerage earlier that month?
posted by smackfu at 11:26 AM on January 26, 2007

IANYL, IANYA, etc.

Can I just say that I purchased them in February of that year and use a historical quote service to pick the lowest-trading day?

No. That would be stupid and fraudulent.

Your old broker almost definitely still has this information somewhere, but you might have to contact them by phone to try to get it. Sometimes, basis information gets passed from broker to broker when you move accounts, so you might check with your current broker as well. If you really can't find it through them, you might try asking the IRS what to do about it, or you might end up just estimating the date on which you bought it and then finding what the price was on that day. You can also find a ton of stuff that tells you how to address issues like this on the IRS website.

In your regular return, the IRS does not require any documentation of costs (although you will usually have a 1099 or something from your broker reflecting it anyway), but you will need to prove everything if you're audited, so it's really a good idea to have documentation for everything that's in your return.

I wouldn't use an accountant for this, unless you are anyway or your capital gains/losses issues are really complicated. The hundreds of dollars it would likely cost aren't worth it, in my opinion.

Use this as a reminder to always keep records of stock purchases and sales, especially when you move from one financial institution to another.
posted by jcwagner at 11:28 AM on January 26, 2007

@smackfu: Yeah, that's what I thought too, but my current thinking is informed by this article: https://www.gainskeeper.com/WebHelp/How_to_Calculate_Cost_Basis.htm.

@jcwagner: Tried that, they weren't very helpful. As far as keeping better records, I've since learned my lesson. Unfortunately, I was in high school at the time of the purchases, and my statements appear not to have survived one of my several moves since then.

At any rate, I'm definitely not hiring an accountant. I didn't mention it before, but the total portfolio was worth just over $2000 when I sold it. Whatever I might owe, it's going to be less than a few hours with a tax specialist.
posted by electric_counterpoint at 12:03 PM on January 26, 2007

was the lowest price in 2003 significantly less than the price in 2/04? if not, you might want to file using a worst-case scenario.
posted by probablysteve at 12:30 PM on January 26, 2007

I was just on the phone with the IRS asking something else, so I asked about this, too. They are very helpful about this kind of stuff.

You should call and get your own answer, but the person I talked to said just use the cost from the end of the month or quarter in which you bought it. You might take personal notes reflecting this and put it in your personal files in case you are audited and have to demonstrate what you did, but you don't have to provide any evidence when filing your return.
posted by jcwagner at 12:51 PM on January 26, 2007

IAAL. Do not select the best date for you that you can find. That's fraud — a felony — and you could get very, very fucked. Just select an approximately correct date.
posted by raf at 2:59 PM on January 26, 2007

(This is not legal advice; consult competent counsel.)
posted by raf at 3:00 PM on January 26, 2007

Is there anything you can dig up that might better pin down the purchase date? Do you have check stubs or bank statements from 2003 that might indicate when the money was transferred?

If not, I would just make a good faith best estimate using 2003 stock prices. Your chances of being audited over a $2000 transaction are minuscule. The worst case is that an auditor would reduce your cost basis to zero and then you would owe 15% of $2000, that is $300. It is hardly worth losing sleep over.
posted by JackFlash at 3:10 PM on January 26, 2007