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Frequently Asked Tax Questions And Answers
Keyword: Stock Sale 1.1 IRS Procedures: General Procedural Questions
How long do I need to keep certain records?
Records such as receipts, canceled checks, and other documents that prove
an item of income or a deduction appearing on your return should be kept at
least until the statute of limitations expires for that return. Usually this
is three years from the date the return was due or filed, or two years from
the date the tax was paid, whichever is later. There is no period of limitations
when a return is false or fraudulent or when no return is filed. You should
keep some records indefinitely, such as property records, since you may need
them to determine the basis of the property if it to prove the amount of gain
or loss if the property is sold. For more details, refer to Publication 552 Recordkeeping
for Individuals, or Tax Topic 305 on Recordkeeping.
If you are an employer, you must keep all your employment tax records for
at least four years after the tax is due or paid, whichever is later. For
additional information, refer to Publication 583, Starting a Business
and Keeping Records. People in business often have expenses for travel,
entertainment, and gifts. The documentation you should keep for each of these
expenses can be found in Publication 463, Travel, Entertainment, Gift
and Car Expenses.
References:
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
I received stock as a gift from my grandparents. I am selling the stock
this year. How can I figure the basis of the gifted stock?
To figure the basis of property you receive as a gift, you must know its adjusted
basis to the donor just before it was given to you, its fair market value (FMV) at
the time it was given to you, and the amount of any gift tax paid on it.
If the FMV of the property was less than the donor's adjusted basis, your basis
for figuring gain on its sale or other disposition is the same as the donor's adjusted
basis plus or minus any required adjustment to basis during the period you held the
property. Your basis for figuring loss on its sale or other disposition is its FMV
at the time you received the gift plus or minus any required adjustment to basis during
the period you held the property.
If the FMV of the property was equal to or greater than the donor's adjusted basis,
your basis for figuring gain or loss on its sale or other disposition is the same
as the donor's adjusted basis at the time you received the gift. Increase your basis
by all or part of any gift tax paid, depending on the date of the gift.
For further complete information, refer to Publication 17, chapter 14, Basis
of Property.
For additional information on this subject see Gifts.
References:
When I sell shares of stock in a company that merged with the company I
originally invested in, do I use the basis and holding periods based on the purchase
of shares in the original company?
When you trade stock in one corporation for stock in another as part of a merger
or other qualifying reorganization, you may have a nontaxable exchange. The basis
of the stock you received is generally the same as the basis of the old stock, increased
by any gain recognized on the exchange (including gain that is treated as a dividend)
and decreased by the value of property or money received.
You may receive cash or something of value instead of a fractional share if the
number of shares of new stock doesn't divide evenly into the number of shares of the
old stock. You treat this as a sale of the fractional share.
Your basis in the new stock is determined, in whole or in part, by your basis in
the old stock. Your holding period for the new stock will include the holding period
for the old stock, provided that the old stock was held as a capital asset at the
time of the exchange. For special basis rules relating to incentive stock options
and options granted under employee stock purchase plan see Revenue Ruling 80-244,
in IRS 1980-2 Cumulative Bulletin at page 235.
Refer to Publication 550, Investment Income and Expenses.
References:
How do I figure the cost basis of stock that has split, giving me more of
the same stock, so I can figure my capital gain (or loss) on the sale of the stock?
When the old stock and the new stock are identical the basis of the old shares
must be allocated to the old and new shares. Thus, you generally divide the adjusted
basis of the old stock by the number of shares of old and new stock. The result is
your new basis per share of stock. If the old shares were purchased in separate lots
for differing amounts of money, the adjusted basis of the old stock must be allocated
between the old and new stock on a lot by lot basis.
References:
How do I calculate the cost basis of the shares that have split and are
later sold from my employee stock purchase plan?
You need to determine what your basis is in the company stock on the date of the
split. The new shares assume part of your basis in the company stock on that date.
You must divide the adjusted basis in the old stock by the number of shares of old
and new stock. The result is your basis for each share of stock.
For example, if you owned two shares of company stock with a basis in one at $30
and the other $45, and the company declares a three for one stock split, you now have
six shares of stock. Three of the shares will have a basis of $10, and three will
have a basis of $15.
Because this is an Employee Stock Option Plan, you may have to report some or all
of the gain on the sale of this stock as ordinary income (wages). For more information
about employee stock option plans, see Publication 525 , Taxable
and Nontaxable Income.
References:
How do I prepare Schedule D for various stocks when records as to the original
purchase price have been lost?
The basis of stocks or bonds you own generally is the purchase price plus the costs
of purchase, such as commissions and recording or transfer fees. If you acquired stock
or bonds other than by purchase, your basis is usually determined by fair market value
or the previous owner's adjusted basis.
The basis of stock must be adjusted for certain events that occur after purchase.
For example, if you receive more stock from nontaxable stock dividends or stock splits,
you must reduce the basis of your original stock. You must also reduce your basis
when you receive nontaxable distributions, because these are a return of capital.
The taxpayer has the burden of proving the basis of property.
Failure to prove cost results in a basis determined by the IRS or even a basis of
zero.
Except for certain mutual fund shares, you cannot use an average price per share
to figure the gain or loss on the sale of stock.
Refer to Stocks and Bonds under Basis of
Investment Property in chapter 4 of Publication 550, Investment
Income and Expenses .
References:
How do I figure the cost basis when the stocks I'm selling were purchased
at various times and at different prices?
If you can identify which shares of stock you sold, your basis is what you paid
for the shares sold (plus sales commissions). If you sell a block of the same kind
of stock, you can report all the shares sold at the same time as one sale, writing VARIOUS in the "date acquired" column of Form 1040, Schedule D (PDF). However, what you enter into the "cost or other basis" column
is the total of all the acquisition costs of the shares sold.
If you cannot adequately identify the shares you sold and you bought the shares
at various times for different prices, the basis of the stock sold is the basis of
the shares you acquired first (first-in first-out). Except for certain mutual fund
shares, you cannot use the average price per share to figure gain or loss on the sale
of stock.
For more information, refer to Publication 550, Investment Income and Expenses.
References:
Can the cost averaging method be used for calculating the cost basis of
stocks, or is it limited only to mutual fund shares?
The average basis method may be used only for mutual fund shares that were purchased
at various times for various prices if the shares are left in the custody of a custodian
or agent in an account maintained for the acquisition or redemption of the shares.
References:
How do I compute the basis for stock I sold, when I received the stock over
several years through a dividend reinvestment plan?
The basis of the stock you sold is the cost of the shares plus any adjustments,
such as sales commissions. If you have not kept detailed records of your dividend
reinvestments, you may be able to reconstruct those records with the help of public
records from sources such as the media, your broker, or the company that issued the
dividends.
If you cannot specifically identify which shares were sold, you must use the first-in
first-out rule. This means that you deem that you sold the oldest shares first, then
the next oldest, then the next-to-the-next oldest, until you have accounted for the
number of shares in the sale. In order to establish the basis of these shares, you
need to have kept adequate documentation of all your purchases, including those that
were through the dividend reinvestment plan. You may not use an average cost basis.
Only mutual fund shares may have an average cost basis.
Refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.
References:
I know the basis of stock includes the cost of the original purchase, but
does it also include the value of stock acquired through a dividend reinvestment plan?
Unless you sell all of your shares at one time, your total basis, which includes
both your original purchase and any purchases through a dividend reinvestment, is
not the figure used to report the sale of shares. If you sell less than all of your
shares at one time, you need to have kept adequate documentation of all your purchases,
including those that were through the dividend reinvestment plan in order to establish
the basis of the shares sold. You may not use an average cost basis. Only mutual fund
shares may have an average cost basis.
When reporting the sale of shares of stocks, the basis for the calculation of gain
or loss is the actual cost (plus adjustments, such as sales commissions) of those
shares. If you cannot specifically identify which of your shares were sold, you must
use the first-in first-out rule.
For more information, refer to Publication 550, Investment Income and
Expenses, and Publication 551, Basis of Assets.
References:
Do I have to pay taxes again on the stock acquired through a dividend reinvestment
plan when I sell them?
After you report the dividends as income, you have basis in the shares acquired
through dividend reinvestment. When you report the sale of the shares, you will be
taxed only on the amount that the sales proceeds (minus commissions) exceed your cost
basis (in this case, the amount of the dividends reinvested).
References:
I purchased stock from my employer under an employee stock purchase plan.
Now I have received a From 1099-B from selling it. How do I report this?
If the special holding periods are met, generally treat gain or loss from the sale
of the stock as capital gain or loss. However, you may have compensation income if:
The option price of the stock was below the stock's fair market value at the time
the option was granted, or
You did not meet the holding period requirement.
The holding period requirement is that you must hold the stock for more than 2
years from the time the stock is granted to you and for more than 1 year from when
the stock was transferred to you. If you do not meet these holding period requirements,
there is a disqualifying disposition of the option. The compensation income that you
should report in the year of the disposition is the excess of the fair market value
of the fair market of the stock on the date the stock was transferred to you less
the amount paid for the shares.
If the holding period requirement is met, but the option price is below the fair
market value of the stock at the time the option was granted, you report the difference
as compensation income (wages) when you sell the stock. Generally, this compensation
income is the lesser of the excess of the fair market value on the date of the disposition
less the exercise price OR the excess of the fair market value of the option when
granted less the exercise price.
If your gain is more than the amount you report as compensation income, the remainder
is a capital gain reported on Form 1040, Schedule D (PDF).
If you sell the stock for less than the amount you paid for it, your
loss is a capital loss, and you do not have ordinary income.
For more information, refer to Publication 525, Taxable and
Nontaxable Income, and Publication 551, Basis of Assets.
References:
Where on the tax return do I enter the compensation income I had from the
sale of stock that I purchased under my employer's stock purchase program?
The compensation income is reported on line 7 (wages, salaries, tips, etc.) of
Form 1040. It is added to the stock's basis used when determining capital gain or
loss on the sale of the stock. Any capital gain or loss on the stock sale is reported
on Form 1040, Schedule D (PDF), Capital Gains and
Losses.
References:
Should I advise the IRS why amounts reported on Form 1099-B do not agree
with my Schedule D for proceeds from short sales of stock not closed by the end of
year that I did not include?
If you are able to defer the reporting of gain or loss until the year the short
sale closes, the following will allow you to reconcile your Forms 1099-B to your Schedule
D and still not recognize the gain or loss from the short sale:
Your total of lines 3 and 10, column (d), on your Schedule D should equal your
total gross proceeds reported to you on all Forms 1099-B.
In columns (b) and (c) write "SHORT SALE," and
in column (f) write "See attached statement."
In your statement, explain the details of your short sale and that it has not
closed as of the end of the year. Include your name as it appears on the return and
your social security number.
For more on these rules and exceptions that may apply, refer to Chapter 4 of Publication 550, Investment Income and Expenses.
References:
How do I determine my gain or loss on the proceeds reported on Form 1099-B
from a short sale entered into last year if I have not yet bought the stock to deliver
back to my broker?
In general, you cannot determine your gain or loss until you purchase the stock
that you are going to deliver to close the short sale. You still need to report the
gross proceeds on Schedule D so that the total of lines 3 and 10, column (d), reconciles
with all of your Forms 1099-B.
Also, in columns b and c write "short sale." In column f, write "see attached statement."
In the statement, explain the details of the short sale and that it is not closed.
Include your name as it appears on your return and your social security number.
For more information on rules and exceptions that may apply, refer to Chapter 4
of Publication 550, Investment Income and Expenses.
References:
I purchased stock through an employee stock purchase plan at my work which
split three months later. Three months after that, I sold the stock at a gain. How
does the split affect how I report the stock sale on my tax return?
With either of the two types of statutory employee stock option plans, there is
no income as a result of the granting of the option or the exercising of the option
(purchasing stock). These two types of plans are the employee stock purchase plan
and the incentive stock option plan. However, if you don't hold the stock long enough
to meet the holding period requirements, when the stock is sold you may have to report
compensation income (wages). The split will affect the computation of capital gain
and compensation income, if any.
For the stock purchased under an employee stock purchase plan to receive favorable
tax treatment, it must be held for at least two years after the stock is granted and
at least one year after the stock is transferred to you. If the holding periods are
not met, the lesser of the fair market value of the stock on the grant date minus
the option price or the fair market value on the sale date minus the amount you paid
for the stock is compensation income (wages). To the extent that the gain is being
taxed as wages on your return, it becomes part of your adjusted basis in the stock
sold. When determining basis, the amount you paid for the stock is divided equally
among the shares received in the split.
For information on incentive stock option plans and nonstatutory stock options,
or more information on employee stock purchase plans, refer to Publication 525, Taxable
and Nontaxable Income
References:
How do I calculate the sale of a stock that had a reverse split?
Reverse splits are where your number of shares in a company's stock decreases.
Your total basis remains the same; it is your per share basis that increases. You
must divide your basis in the old shares by the number of new shares. For example,
you own 4 shares of stock. Two of these shares have a basis of $15; each of the other
two have a basis of $20 each. There is now a one for two reverse split. Now you have
two shares. One has a basis of $30 the other has a basis of $40. If your receive cash
because of the sale of a fractional share you have a capital gain or loss that is
reported on Form 1040, Schedule D (PDF) , Capital
Gains and Losses . Please see Fractional Shares in Publication 550, Investment
Income and Expenses , for further information on the sale of a fractional share.
References:
10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
If I sell one mutual fund and use the proceeds to buy another, do I have
to report the capital gains or can I wait until I sell and don't buy another fund?
Does it matter if I stay within the same family of funds?
You would have to report any capital gains realized on the sale. Even assuming
this transaction meets the requirements of an exchange, rather than a sale, the exchange
of shares of one fund for those of another is a taxable exchange. This is true even
if both funds are within the same family of funds.
References:
I have both purchased and sold shares in a money-market mutual fund. The
fund is managed so the share price is constant. All gain is reported as dividends.
Do I have to report the sale of these shares?
Yes, you report the sale of your shares on Form 1040, Schedule D (PDF), Capital
Gains and Losses. Generally, whenever you sell, exchange, or otherwise dispose
of a capital asset, you report it on Schedule D.
If the share price were constant, you would have neither a gain nor a loss when
you sell shares because you are selling the shares for the same price you purchased
them.
If you actually owned shares that were later sold, the fund or the broker should
have issued a Form 1099-B There is no requirement with that form that there be gain
or loss on the sale, only a sale or exchange of an investment asset and sales proceeds.
References:
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