In most situations, the basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services. Cost includes sales tax and other expenses connected with the purchase.
How do you report cost basis on taxes?
You—the taxpayer—are responsible for reporting your cost-basis information accurately to the IRS. You do this in most cases by filling out Form 8949. (For tax history junkies, this form replaced the Form 1040 Schedule D-1 in tax year 2011 for most cost-basis reporting.)
When do you need to know the cost basis of an asset?
You’ll need the cost basis in an asset when you claim a credit or another tax break based on the asset, or when you deduct depreciation on the asset. You’ll also need to know your cost basis when you sell or trade an asset in order to determine your gain or loss on the sale or the basis in a new asset acquired by trade.
How is the cost basis of a mutual fund reported?
Cost basis is essentially the “what you paid” part of the transaction plus or minus any adjustments due to dividends, interest, returns of capital, etc. The buy and sell transactions are reported on IRS Form 8949, which you receive come tax time and will need to include in order to pay your taxes.
When do you need to adjust your cost basis?
If the stock splits, and you sell less than 100% of your shares of a stock, you’ll need to adjust your cost basis for the split so you can correctly calculate your cost basis. The same is true if the stock has a reverse split. You need to lower your cost basis for tax benefits you receive.
What are the different types of cost basis reporting?
There are basically three categories of cost basis reporting that investors will encounter: average basis, FIFO, and specific lot/specialized basis. Each has its own pros and cons as well as unique tax issues. Average Basis: This is the default option for many mutual funds.
