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:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital Gains and Losses

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:

• Publication 552, Recordkeeping for Individuals
• Tax Topic 409, Capital Gains and Losses

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, 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 made 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.

I purchased stock from my employer under an employee stock purchase plan. Now I have received a Form 1099-B from selling it. How do I report this?

If the special holding period requirements described below are met, the sale of stock is treated generally as capital gain or loss. However, you may have compensation income if:

1. The option price of the stock was below the stock's fair market value at the time the option was granted, or
2. You did not meet either or both of the holding period requirement.

The holding period requirements are that you must hold the stock for more than 2 years from the time the option is granted to you and for more than 1 year from when the stock was transferred to you. If you do not meet either or both of these holding period requirements there is a disqualifying disposition of the stock. The compensation income that you should report in the year of the disqualifying disposition is the excess of the fair market value of the stock on the date the stock was transferred to you over the amount paid for the shares. .

If the holding period requirements are met, but the option exercise price is below the fair market value of the stock at the time the option was granted, you report the discount as compensation income (wages) when you sell the stock. Generally, this compensation income is the lesser of the excess of the fair market value of the stock on the date of the disposition over the exercise price OR the excess of the fair market value of the stock at the time the option was granted over the exercise price.

If the holding period requirements are met and 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.

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?

If you are able to defer the reporting of gain or loss until the year the short sale closes, there are certain notations you can make on you Form 1040, Schedule D (PDF), Capital Gains and Losses that will allow you to reconcile your Form 1099-B (PDF) to your Form 1040, Schedule D (PDF) and still not recognize the gain or loss from the short sale. Include your name as it appears on the return and your social security number.

For more on these rules and the rules for put options and wash sales refer to Chapter 4 of Publication 550, Investment Income and Expenses.

References:

• Tax Topic 409, Capital Gains and Losses

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. That form is issued without regard to whether there is a gain or loss on the sale. It reports a sale or exchange of an investment asset and sales proceeds.

References:

• Publication 564, Mutual Fund Distributions