Factors such as whether the stock is purchased, gifted or inherited determine cost basis, notes TurboTax. Cost basis impacts the profit on sale and has varying tax implications.
Purchased stock has a cost basis equal to the price paid plus any associated commissions, explains TurboTax. All brokers maintain detailed records of cost basis for investors, notes Forbes. This approach eliminates the need for detailed paperwork and helps establish communication with the Internal Revenue Service.
The sale of stock impacts the relevant cost basis for gifted stock, reports TurboTax. If selling for a profit, an investor recognizes basis equal to the basis of the original owner. This methodology is known as a basis transfer. When selling the stock at a loss, the basis is the lower of the previous owner's basis or the value of the stock at the time of the gift. When receiving stock as a gift, it is important to communicate with the gift giver regarding details of the original stock acquisition.
When inheriting stock, basis is equal to the value of the asset on the date of death of the previous owner. In the case of asset appreciation, the new basis is stepped up to the current market value, according to TurboTax. The same rule applies for an asset that depreciates immediately prior to the death of the original owner.