Missing Socks and Cost Basis

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Disclaimer: This article discusses a topic that is related to taxes but is not and should not be construed as tax advice. Please get in touch if you would like to discuss your particular situation.

Missing cost basis: Background

Are you missing the cost basis for an asset you are considering selling or have already sold? If so, you are not alone; missing or lost cost basis data is a common issue. It can also be a significant issue since the cost basis directly influences the amount of taxes you may have to pay when selling your holdings (more cost basis = less capital gain = less taxes).

For some, the situation is easy to resolve and this article may be all you need. For others, you may need to seek out more help. I would be happy to help but you might want to try your accountant first (assuming he does not charge by the hour).

This article is broken down into three (arguably four) pieces. The first section explains why missing or lost cost basis is such a common issue for many people. The second section discusses types of documentation that can be helpful. Then the third section highlights some of the relevant calculations and tools I find useful when dealing with this challenge.

The fourth section addresses a related issue but I will publish that as a standalone article. The title I have in mind for this is The Computershare Nightmare. Many people, including myself and my clients, had poor experiences when dealing with this company (Computershare). So that article will highlight some of the primary issues and then provide specific steps and tips to help you resolve such issues. In the meantime, please feel free to get in touch if you are struggling to resolve any issues with this firm.

Missing cost basis and socks: How & why

If I had to guess, I would say very few of my socks are more than three years old because I tend to be rather active. I play sports and struggle to resist chasing my kids around even when I am wearing my dress shoes and socks.

I am also fairly organized (some might use the OCD label). So I would say I have a good idea of where they are at any given time – on my feet, in the laundry hamper, getting washed, or in my sock drawer. Notwithstanding this rather predictable life cycle of my socks, I have still managed to lose a few through the years.

Why I am talking about missing socks? My point is that it is easy to lose things. So when we talk about the price(s) at which we acquired shares of stock years or decades ago, it should be no surprise this information occasionally (regularly?) gets lost as well.

Computers and digital recordkeeping have been around for some time now. However, even when this technology was commonplace in the early 2000s, financial institutions were still not required to maintain cost basis data. Indeed, the IRS did not require financial institutions to maintain and report cost basis data for stocks until 2011. Indeed, that is when financial institutions started implementing provisions from the Emergency Economic Stabilization Act of 2008.

Until that point, the onus was on the investor to maintain these records and correctly report them when disposing of shares and calculating their capital gains or losses. Even if one maintained all of this data, the calculations can still be tedious and likely challenging for many people. Perhaps some of you can get your accountant to work out the math correctly but I am rather proficient at this if you would like some help.

Gifted stock

I implicitly assumed you were the original buyer of the shares in the situation above. However, you may have received the shares as a gift from someone else. In this case, you may never have actually possessed the cost basis data.

Gifted shares should generally retain the cost basis from the previous owner. However, I suspect very few people inquire about the cost basis upon receiving such a gift. If someone gifted you a stock certificate or transferred shares into your account as a gift, what would you say?

“Thank you!” or ...
“Great but what is the cost basis of these shares?”

You know what they say about gift horses.

Note: It is worth mentioning that inheriting shares constitutes a different situation. When assets are inherited, they generally receive a step-up in basis to their fair market value on the date of death. So the original owner’s cost basis would no longer be relevant.

Even if you get the information you need for the person or entity who gave you the shares, the rules can be a bit quirky with gifted shares (see IRS description here). So make sure you follow them.

the bottom line is this ... Regardless of whether you acquired the shares yourself or they were gifted to you, your goal is to find the key pieces of information that will lead you to the cost basis. In particular, you will typically need:

The original date of acquisition, number of shares, and purchase price
The dates and amounts of any subsequent investments (e.g., reinvested dividends)
Any relevant corporate actions (mergers, acquisitions, spinoffs, stock splits, fund conversions, etc.)

Now that I have highlighted how common this issue is, let us look into how to address it.

Look for helpful documentation

Let's restate the situation: You have (or have sold) stock holdings but do not know the cost basis. I hope this section can help you address this issue. Failing that, I have dealt with this situation many times for my clients and would be happy to help you.

My first and most obvious recommendation is to try and track down the information. Where did these shares come from? If you purchased them, try to locate the original trade confirmations with the broker or custodian through which you placed the buy order. If you have any old statements or related documents, they could be helpful too.

Original purchase trade confirmation
Account statement for the period within which the purchase was made
Any account statements after the purchase (sometimes cost basis data is included)

Like socks, this documentation often gets lost. So the next step is to check with the financial firm where the shares were purchased (or currently held). Even though it was not required, many firms still maintained records of these transactions. You may get lucky.

If you cannot find data regarding the original purchase, you might still find other helpful data points. For example, you may come across records that could be helpful if you end up estimating the cost basis. That’s right. If we cannot find actual documents or digital records that specify the cost basis, then you may just have to estimate. The next and last section below discussed this.

If you make a good faith effort to provide a reasonable calculation based on some sort of documentation, I think there is a good chance you will be fine. However, if you submit an estimated cost basis with no documentation and it gets challenged, then the IRS may require you to treat your basis as zero. That is, 100% of the proceeds from selling this stock would be considered capital gain and thus taxable.

Chances are you haven't found a record that precisely states what the total cost basis is (why else are you reading this). So you are probably not out of the hole yet as there is some work left to do. In particular, you have to use the data you do have and make some calculations to come up with an up-to-date total cost basis. That is the topic of the next section.

Recovering or Reconstructing Missing Cost Basis Data

Let's assume you have left no stone unturned in tracking down documentation that could be helpful. At the very least, you should have the current value and/or the number of shares you own. Even if you only had physical share certificates, you can track down and reach the company that maintains records for those shares.

Look for the registration information listed on the share certificates. It is entirely possible the firm listed on the certificates has changed names or been swallowed up by another company. So you might have to jump on Google and do some sleuthing but you should be able to figure out who is keeping the records for your shares.

Now that you are armed with what you own and what it is worth, the focus moves to the cost basis. Depending on how much data or documentation you have found, this task may be easy or painfully difficult.

Ideally, you will have a good idea of the original purchase date. To be sure, this is different than (before) the date on which they were gifted (if they were gifted). If you don't know the exact date, then you will have to estimate it and try to back that up with any type of documentation you could find.

In the simplest case, you might be able to use the current value and the historical appreciation since the acquisition date to back into the original value. Alternatively, you might be able just to take the number of shares and multiply it against the price of the stock on the purchase date.

You will need access to historical stock price data for this. Luckily, there are many free online sources that provide such data (here is a list from Investopedia). Once you get to this point and have the relevant share price data, there are still a few potential pitfalls:

Dividends: If dividends were paid, you have to factor that into the calculation. If you received the dividends, then you would only look at the price appreciation - not a total return which would include reinvested dividends.
Stock splits: Many stocks have split their shares. So 400 shares today might have been just 40 shares one or more decades ago. Most data sources factor this in but it is easy to miss.
Other corporate actions: In addition to stock splits, companies may also have been acquired, spun off, or merged, over the time you owned its shares. This can get a bit more complicated but is still doable if you are analytical.

In addition to the resources highlighted in the Investopedia link above, I use a tool called PortfolioVisualizer. I use the paid version but you can use its free calculator to calculate the performance of portfolios. Of course, you would only be investigating the performance of a one-stock portfolio (or at least one at a time). There are many different options you can use but be sure to select the appropriate dividend reinvestment scheme as highlighted in the first bullet above.

Final Comments

Congratulations if you have gotten this far. It is not a fun topic but one we must deal with occasionally. If you were able to get the data or documentation needed and make the required calculations, then you might be wondering what to do from there.

In some cases, you or your financial advisor can manually enter the cost basis data into your brokerage account. I have done this with Charles Schwab (here is a link to the Schwab form) but I suspect other brokerages offer the same functionality.

Once you get the data into their system and sell your holdings, they should make the required calculations and automatically include them on your next 1099 tax reports. Problem solved!

If it is too late for that, then you may have to enter this data directly into IRS form 8949 when filing taxes the for the year in which the stock was sold.

As a financial planner, I regularly get involved with a variety of activities that target tax efficiency. As with any of these services, recovering cost basis data, as described above, may take more time, effort, and cost than it is worth.

So you might want to consider the worst-case scenario (assuming a cost basis of zero or 100% taxable gain) and how much it would cost you in taxes. For example, you might be in a zero capital gains tax bracket! That can exceed $100k in some cases (married-filing-jointly including standard deductions and no other income).

Say what you will about our consulted tax system but it is rather generous with capital gains. Moreover, if you can source money from other places, then you might consider donating it to a charity or passing it on to heirs when you pass. In both of these cases, you can avoid capital gains taxes on the appreciation.

As always, you should consult a professional financial planner or tax professional to help you with these and other decisions.

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