If you sell an investment such as a stock or mutual fund, the IRS requires that you report any capital gains or losses along with cost basis information.
What Is Cost Basis?
Should I sell at a loss to offset capital gains?
This is a strategy many investors choose, and it can be effective if you haven't bought new shares of the same security within the past month and do not plan to purchase any in the following month. However, if you purchase additional shares of the same or substantially identical security within 30 days before or 30 days after the sale date, you will have made a "wash sale," and you cannot claim the loss on your income tax return. Instead, you can add the disallowed loss to the basis of the security in your account.
Cost basis is the price you paid to purchase a security plus any additional costs such as broker's fees or commissions.
When you sell a security, your tax liability is determined by how much you spent to buy the security (cost basis) and your sales price. If you sell a security for more than the original purchase price, the difference is taxable as a capital gain.
Gains from the sale of securities are generally taxable in the year of the sale, unless your investment is in a tax-advantaged account, such as an IRA, 401(k), or 529 plan. Generally, for those accounts, you only incur taxes when you start taking withdrawals.
Capital gains are taxed at different rates depending on your tax bracket and how long you've held a security. If you sell a security that you've held for more than a year, any resulting capital gains are considered long-term and are taxed at lower rates than ordinary income. Conversely, short-term capital gains are taxed as ordinary income. In addition to offsetting certain capital losses against capital gains, investors can generally deduct net capital losses of up to $3,000 from their taxable income each year. If you incur more than $3,000 in losses in a given year, you can carry forward the remaining loss balance to subsequent years.
How Is Cost Basis Calculated?
The IRS generally identifies two methods for calculating cost basis.
Average cost method – This method takes the total cost of the shares and divides it by the number of shares in the fund. For example, if you own a mutual fund that has 3 shares purchased at $5, $6, and $7; using the average cost method, we'll add up the purchase prices ($18), and divide it by the total shares in the fund (3), resulting in a cost basis of $6. We use this method to calculate cost basis for mutual funds and certain dividend reinvestment plans. To select a different cost basis method, please visit Cost Basis Information TrackingLog In Required.
Actual cost method – As the name suggests, your cost basis is the purchase price of each share. In order to use this method, you'll need to know the actual purchase price of each share. This can be tricky, especially if you purchased shares at different prices and are not sure exactly which shares were sold.
By default, Fidelity uses first in, first out (FIFO) when selling your shares. This means that shares that were bought first are also sold first. For example, let's say you own 200 shares. The first 100 were purchased at $10 per share, the next 50 at $15, and the final 50 at $20 per share. You sell 125 shares. With FIFO, the first 100 shares sold will come from your first batch and the remaining 25 from your second batch.
This can help you keep track of exactly which shares were sold and as a result, help simplify your cost basis calculations. With another disposal method, the sold shares may have come from all 3 batches or just the final 2, making it a little tricky to keep track of your actual purchase price.
Depending on your circ*mstances, FIFO may not be the best disposal method. In some cases, it may be more beneficial to sell shares bought last first. Learn more about our other disposal methods. To change your default disposal method from FIFO, please visit Cost Basis Information TrackingLog In Required.
Cost Basis Reporting Requirements
Taxpayers have a long-standing responsibility to report gains and losses, and related cost basis information when they file their income tax returns. Brokers, such as Fidelity, also have a requirement to report sales information to the IRS on Form 1099-B.
To report capital gains on your return, you must file Schedule D with your Form 1040; most filers need to begin with Form 8949, which provides a format for listing each individual sales transaction that you make during the year.
FAQs
Unless otherwise instructed, Fidelity uses the Average Cost method, which calculates cost basis by averaging the share price for each purchase into one price per share. Shares are debited from the account using the First In, First Out (FIFO) order.
Do capital gains count towards cost basis? ›
For stocks and bonds, the cost basis is generally your purchase price for the securities, including reinvested dividends or reinvested capital gains distributions, plus additional costs such as the commission or other fees you paid to complete the transaction.
Why is my cost basis not showing on Fidelity? ›
Some of the most common reasons for unknown cost basis are: Shares are transferred to the Fidelity account from another institution. Shares were transferred between two accounts registered to different Social Security Numbers. Shares were transferred between mutual fund accounts and brokerage accounts before August, ...
Does cost basis transfer to Fidelity? ›
How does my cost basis information transfer? If your delivering firm participates in the Cost Basis Reporting Service (CBRS), your cost basis information will transfer when you complete Fidelity's online transfer submission process. Cost basis data is typically passed within ten days after the transfer.
What happens if you don't know the cost basis of a stock? ›
The Internal Revenue Service (IRS) says if you can identify the shares that have been sold, their cost basis can be used. 1 For example, if you sell the original 1,000 shares, your cost basis is $10. If you can't make this identification, the IRS says you need to use the first in, first out (FIFO) method.
How does IRS verify cost basis? ›
The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.
Am I taxed on proceeds or cost basis? ›
When you sell a security, your tax liability is determined by how much you spent to buy the security (cost basis) and your sales price. If you sell a security for more than the original purchase price, the difference is taxable as a capital gain.
What cannot be included in the cost basis of a main home? ›
The cost includes the cost of materials, equipment, and labor. However, you may not add the cost of your own labor to the property's basis. Add the interest you pay on construction loans during the construction period, but deduct interest you pay before and after construction as an operating expense.
Does a return of capital reduce cost basis? ›
Answer: The return of principal payments is often called either a return of capital or a nondividend distribution. As a return of your original investment (cost), it reduces your basis. However, your basis can't be adjusted below zero.
How to see capital gains on Fidelity? ›
Steps to View Realized Gains on Fidelity
- Step 1: Log into Your Fidelity Account. ...
- Step 2: Go to the “Accounts & Trade” Tab. ...
- Step 3: Select “Tax Forms” from the Drop-down Menu. ...
- Step 4: Click on “Realized Gains and Losses”
Most brokerages offer cost basis tracking and report any necessary gains and losses to the IRS on Form 1099-B. The general default method for determining cost basis by brokerages is First In, First Out (FIFO).
What is the best cost basis method? ›
First-in, first-out method (FIFO)
This is the default for all investments other than mutual funds. Method implications: Because asset prices tend to rise over time, using FIFO as your cost basis method will have the oldest shares sold first, and those shares will often have the lowest cost basis.
How do I update my cost basis at Fidelity? ›
On the Fidelity.com home page, select the Accounts & Trade tab, then Update Accounts/Features, then select Cost Basis Information Tracking. Under Default Disposal Method, select Change. You'll see a list of all available cost basis tracking methods.
What does the W next to cost basis Fidelity mean? ›
It means that position is affected by a wash sale.
If you sell a position at a loss and purchase that position again 30 days before or 30 days after the sell, the IRS considers this a “wash sale” and disallows the investor to take the benefit of a realized loss.
Can I change the cost basis after selling stock? ›
By law, to revoke the average basis, you must change your cost basis method before the first sale, transfer, or disposition.
How is the cost basis calculated? ›
At the most basic level, the cost basis of an investment is the total amount originally invested, plus any commissions or fees involved in the purchase. This can either be described in terms of the dollar amount of the investment, or the effective per-share price paid for the investment.
Does Fidelity automatically adjust cost basis for wash sales? ›
Automated wash sale and corporate action processing. GainsKeeper helps identify and calculate wash sales and corporate actions and automatically adjusts cost basis. Schedule D functionality. GainsKeeper tracks capital gains throughout the year and helps investors to generate a Schedule D.
How do you determine the cost basis of a stock option? ›
Regarding how to how to calculate cost basis for stock sale, you calculate cost basis using the price you paid to exercise the option if both of these are true: The plan was an incentive stock option or statutory stock option. The stock is disposed of in a qualifying disposition.
