CostBasis.
Stock can be acquired through stock options in various ways:
2. Non-qualified stock options.
3. Restricted stock options.
4. Exercise of a call option you bought.
5. Exercise of a put option you sold.
• granted under a plan approved by shareholders;
• exercisable only by the individual employee or his or her heir;
• exercisable within ten years;
• held for at least two years;
• have an option exercise price no less than fair market value of the stock at the time of.
• not held by an owner of more than ten percent of the voting power;
• held by a person who is an employee of the corporation from the grant date until at least.
three months before exercise (one year if disabled.)
A final caution is that qualified incentive stock options that first become exercisable during any tax year are reclassified as non-qualified if the total fair market value of the stock exceeds $100,000.
How to avoid paying double tax on employee stock options.
Anyone who participates in an employee stock option or stock purchase plan at work could overpay their taxes — perhaps by a lot — if they don’t understand a reporting requirement that took effect in 2014.
Under the requirement, all brokers must report cost basis on Form 1099-B for stock that was both acquired and sold on or after Jan. 1, 2014, through an employee stock option or purchase plan in a way that could result in double taxation, unless the employee makes an adjustment on Form 8949. The new requirement does not apply to restricted stock awarded to employees.
“It’s very confusing and scary,” says Barbara Baksa, executive director of the National Association of Stock Plan Professionals. “The important thing is not to assume that the cost basis reported on Form 1099-B is correct. You have to have confidence in your understanding of how this works to report the adjustment and not be afraid the IRS will treat it as a mistake on your part.”
Stock compensation is common in the Bay Area, especially in tech. Employees who sold company stock last year should begin receiving their 1099s in mid-February. The IRS has not gone out of its way to warn taxpayers about this ticking time bomb. Employees should pay close attention to everything they get from their employer and brokerage firms and strongly consider consulting a tax professional.
Brokerage firms use Form 1099-B to report the sale of stock and other securities to customers and the IRS. Cost basis is what you paid for the stock, including commissions. Proceeds are what you got from the sale, after commissions.
In a normal stock sale, the difference between your cost basis and proceeds is reported as a capital gain or loss on Schedule D. End of story.
However, stock acquired under an employee option or purchase plan is different. At least some of your profit is considered compensation and taxed as ordinary income. It will be included as wages, in box 1 of your W-2 Form. But the sale also must be reported on Schedule D.
And therein lies the rub: Unless you adjust your cost basis, by adding in the compensation component, that amount will be taxed twice — as ordinary income and a capital gain.
From 2011 through 2013, brokers had the option of making this adjustment for the employee and reporting the correct cost basis on Form 1099-B. And most did.
Under the new rules, brokers cannot make this adjustment on shares acquired on or after Jan. 1, 2014, through an employee stock option or purchase plan. They can only report the unadjusted basis, or what the employee paid for the stock. To avoid double taxation, the employee must make an adjustment on Form 8949.
Warning: Do not use the box labeled “1g Adjustments” on Form 1099-B to make this adjustment; that is for something else entirely. The information needed to make the adjustment will probably be in supplemental materials that come with your 1099-B.
Let’s start with a simple example: Say you were granted an option to acquire stock in your company at $10 per share. (We will assume this is a nonqualified option; incentive stock options are a bit different but also fall under the new requirement.)
When the stock is at $30, you exercise your option and simultaneously sell the stock. You have a gain of $20. All of it is ordinary income.
“The company will withhold tax and report that $20 on your W-2 as income. The broker will issue a 1099 for the sale. It will include a cost basis of $10, what you paid for the stock. But your basis is really $30,” Baksa says.
To avoid paying tax on that $20 twice, you must make an adjustment on Form 8949.
What happens if you exercised the option in 2014, when the market price is $30, but hold onto the stock and sell it for $40 in 2015?
In this case, $20 will be added to W-2 for 2014, but you won’t get a 1099-B for 2014.
For 2015, you will get a 1099-B showing $10 in cost basis and $40 in sales proceeds. To avoid double taxation on the $20, you must make an adjustment on Form 8949. The remaining $10 will be taxed as a capital gain.
For shares acquired under an employee stock purchase plan, the adjustment depends on how long you hold the stock after purchase. The scenarios are too complex to give examples at this point.
Note that the new rules apply only to stock acquired in 2014 or later under these plans. It’s not clear what acquired means. Some brokerage firms are using the date a stock option was granted as the acquisition date; some are using the date a stock option was exercised. For stock purchase plans, the acquisition date is usually the purchase date, Baksa says.
In any case, for stock that was acquired under one of these plans before 2014, brokers have the option of reporting the right basis (adjusted) or the wrong basis (unadjusted). Not all brokers are reporting it the same way.
For consistency, some brokers, including E-Trade and Fidelity, will report the unadjusted basis for all shares sold in 2014 under these plans regardless of when they were acquired. Fidelity will include adjusted basis in a supplemental document.
Charles Schwab is taking one approach for stock options and another for stock purchase plans. It notes that options usually do not vest, or become available for sale, for at least one year after the grant date. As a result, very few customers sold stock in 2014 that was also granted in 2014. So for 2014, it will report adjusted basis for all shares acquired through options. For 2015 and thereafter, it will report unadjusted basis for all option shares.
For shares acquired under employee stock purchase plans, however, Schwab will report unadjusted basis for all shares, regardless of when they were acquired.
Intuit, the maker of TurboTax, says employees who use its tax-preparation software will be able to make the correct adjustments through the interview process. “Regardless of how the broker reports it, we are going to get it right,” says Bob Meighan, a vice president with TurboTax.
Bruce Brumberg, founder of Mystockoptions, said most people who sold stock acquired through option or purchase plans will have compensation income and need to make an adjustment on Form 8949 (unless the broker has made the adjustment). The only times they would not have compensation, and not need to make an adjustment, is if they:
•Exercised an incentive stock option and held it long enough to get a qualifying disposition (at least two years from grant date and one year from purchase).
•Exercised an incentive stock option and sold the stock for less than they paid.
•Sold stock acquired through a purchase plan for less than the purchase price in a qualifying disposition.
The new reporting requirements do not apply to restricted stock. Employees pay nothing for restricted stock. When it vests, the entire value on the vesting date is treated as compensation and added to their W-2 for that year.
Suppose an employee gets restricted stock that is worth $1,000 when it vests and $1,500 when it is sold. The $1,000 is treated as compensation and added to the employee’s W-2.
When the stock is sold, the broker will send a 1099-B showing sales proceeds of $1,500. It has never had to provide a cost basis on the 1099-B, and still doesn’t. Some might provide a cost basis and if they do, it is usually the adjusted basis, which is $1,000.
How do I figure out my cost basis on a stock investment?
Investopedia.
The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. It is used to calculate the capital gain or loss on an investment for tax purposes.
At the most basic level, the cost basis of an investment is just the total amount invested into the company plus any commissions involved in the purchase. This can either be described in terms of the dollar amount of the investment, or the effective per share price that you paid for the investment.
The calculation of cost basis can be complicated, however, due to the many changes that will occur in the financial markets such as splits and takeovers. For the sake of simplicity, we will not include commissions in the following examples, but this can be done simply by adding the commission amount to the investment amount ($10,000 + $100 in commissions = $10,100 cost basis).
Imagine that you invested $10,000 in ABC Inc., which gave you 1,000 shares in the company. The cost basis of the investment is $10,000, but it is more often expressed in terms of a per share basis, so for this investment it would be $10 ($10,000/1,000). After a year has passed, the value of the investment has risen to $15 per share, and you decide to sell. In this case, you will need to know your cost basis to calculate the tax amount for which you are liable. Your investment has risen to $15,000 from $10,000, so you face capital gains tax on the $5,000 ($15 - $10 x 1,000 shares). (For further reading, see A Long-Term Mindset Meets Dreaded Capital Gains Tax and Tax Tips For The Individual Investor .)
If the company splits its shares, this will affect your cost basis per share. Remember, however, that while a split changes an investor's number of shares outstanding, it is a cosmetic change that affects neither the actual value of the original investment, nor the current investment. Continuing with the above example, imagine that the company issued a 2:1 stock split where one old share gets you two new shares. You can calculate you cost basis per share in two ways: First, you can take the original investment amount ($10,000) and divide it by the new amount of shares you hold (2,000 shares) to arrive at the new per share cost basis ($5 $10,000/2,000). The other way is to take your previous cost basis per share ($10) and divide it by the split factor (2:1). So in this case, you would divide $10 by 2 to get to $5. (For more insight, check out Understanding Stock Splits .)
However, if the company's share price has fallen to $5 and you want to invest another $10,000 (2,000 shares) at this discounted price, this will change the total cost basis of your investment in that company. There are several issues that come up when numerous investments have been made. The Internal Revenue Service (IRS) says that if you can identify the shares that have been sold, then their cost basis can be used. For example, if you sell the original 1,000 shares, your cost basis is $10. This is not always easy to do, so if you can't make this identification, the IRS says you need to use a first in, first out (FIFO) method. Therefore, if you were to sell 1,500 shares, the first 1,000 shares would be based on the original or oldest cost basis of $10, followed by 500 shares at a cost basis of $5. This would leave you with 1,500 shares at a cost basis of $5 to be sold at another time.
In the event that the shares were given to you as a gift, your cost basis is the cost basis of the original holder, or the person who gave you the gift. If the shares are trading at a lower price than when the shares were gifted, the lower rate is the cost basis. If the shares were given to you as inheritance, the cost basis of the shares for the inheritor is the current market price of the shares on the date of the original owner's death. There are so many different situations that will affect your cost basis and because of its importance with regards to taxes, if you are in a situation in which your true cost basis is unclear, please consult a financial advisor, accountant or tax lawyer.
Swanger, Rose.
The best way to find out is to review your statement from the investment firm. Starting in tax year 2011, investment firms were required to report the adjusted basis and whether any gain or loss on a sale is classified as short-term or long-term from the sale of "covered securities" on Form 1099-B. This requirement definitely has made everyone’s financial life a little easier. However, it’s still your responsibility to verify the reported data, such as the original purchase price, purchase date, selling price, selling date, etc. The data alone will decide if you qualify for the beneficiary long-term or short-term gains. Best!
Capriotti, Michael.
Calculating cost basis is simple & straight forward. It’s very important to know because you as the investor are responsible to the IRS. The cost basis is what you paid for the stock + the commission. A quick example is you purchase 100 xyz stock $100 and pay the brokerage a $20 commission. Your basis would be $10,020.
Other factors to consider when calculating cost basis are stock splits, dividends & special situations like a gift or inheritance.
If you need additional help, I recommend checking out wwwbasis/. Netbasis’ database of securities information goes back to 1925, and automatically accounts for all splits, mergers & spin-offs.
Itkin, Laurie.
If you inherited the stock, generally the cost basis will be the market price of the stock multiplied by the number of shares on the date the holder died.
If you purchased the stock within the last few years, you should be able to find the cost basis by accessing your account at your brokerage firm. If you can't find it online, you can call.
If you bought the stock many years ago and the company merged or the stock was split, that can be a time-consuming research exercise. You can often find historical stock prices online but you won't get the complete picture.
Hunter, David.
You should look for your original purchase amount plus any subsequent additions. The total cash inflow will be your cost basis.
Save on Taxes: Know Your Cost Basis.
Many people dislike thinking about taxes so much that they ignore the topic until filing season rolls around. Unfortunately, waiting until the last minute to deal with tax matters can lead to missed opportunities to potentially reduce your tax bill.
Investors who include tax planning as part of their investing strategy could potentially see significant tax benefits over the long run, says Hayden Adams, director of tax and financial planning at the Schwab Center for Financial Research.
You shouldn’t just be thinking about capital gains and losses. Savvy investors know how to manage the so-called “cost basis” and holding periods of their investments to help reduce gains that are subject to taxes. Knowing your cost basis can be a valuable tool.
What is cost basis?
Simply put, your cost basis is what you paid for an investment, including brokerage fees, “loads” and any other trading cost—and it can be adjusted for corporate actions such as mergers, stock splits and dividend payments. This matters because your capital gain (or loss) will be the difference between the cost basis and the price at which you sell your securities. This cost is pretty easy to calculate — if you don’t reinvest dividends or dollar-cost average when you invest.
But if you buy over time—even automatically through a dividend reinvestment plan—each block of shares purchased is likely to have a different cost and holding period. Thus, you can pick and choose among the high - or low-cost and long - or short-term shares when you sell, and make the sale work to your best tax advantage.
Alternatively, you can go with the automatic default method, which requires zero effort or calculation on your part—but could cost you more in taxes. (Determining the cost basis for bonds can be more complicated, particularly if you bought them between 1993 and 2013, in which case you’d have to consider whether you bought them at “par”—or face value—paid a premium, or got a discount.)
Federal tax rules require brokerage firms to report your cost basis to the IRS when you sell an investment only if that investment was purchased after one of the following dates:
Equities acquired on or after January 1, 2011. Mutual funds, ETFs and dividend reinvestment plans acquired on or after January 1, 2012. Other specified securities, including most fixed income securities and options acquired on or after January 1, 2014.
Whether or not a brokerage reports your cost basis to the IRS, you’re responsible for reporting the correct amount when you file your taxes. And the accounting method you choose to identify the shares you sell can make a big difference in the amount you end up paying. To understand why, you have to know a little about how the IRS looks at cost basis accounting.
First in, first out.
The cost basis of your shares doesn’t matter much until you sell. But when you do, the IRS gives you two ways to calculate the cost basis with individual stocks and four ways to figure it with mutual funds.
The default method—the accounting method the IRS will assume for both stock and mutual fund sales if you don’t provide instructions to the contrary—is called FIFO, or “first in, first out.” That means that if you sold 100 shares of a 1,000-share holding, the IRS will assume that the shares you sold were the first, or oldest, ones you bought. Those, of course, are likely to have the lowest cost and the highest tax obligation, assuming a rising market.
Specific identification.
The other option with individual shares is called “specific identification.” Specific identification is the method likely to give you the most flexibility and potentially the best tax result.
Let’s say you bought 500 shares of XYZ Corp. 10 years ago for $10 a share, or $5,000; you also paid a $50 brokerage commission for a total cost of $5,050, or $10.10 a share. Several years later you bought a second group of 500 shares for $60 a share, or $30,000; you also paid a commission of $10, for a total of $30,010, or $60.02 a share.
Now, let’s say this stock has continued to appreciate in value, and each share is now worth $100. You want to liquidate 100 shares (assuming a $10 commission on the sale). Depending on which method you use, you could owe taxes on $8,980 in gains—or on just $3,988 in gains . (See the table below for details.)
Identifying shares.
How do you identify the specific shares you want to sell? If you’re placing the order by phone, you can tell your broker which shares you’re selling (for example, “the shares I bought on July 5, 2012, for $11 each”).
If you’re online, the approach will vary by brokerage. At Schwab, you’ll see your cost basis method on the order entry screen; if you opt for the Specified Lots method, you’ll be able to select which lots you want to sell.
Your brokerage will confirm the sale of those specific shares, which allows you to report the higher cost and the lower capital gain on your tax return.
Options for mutual fund investments.
Investors in mutual funds have two additional options: “average cost, single category” and “average cost, double category.” The “average cost, double category” method allows you to calculate an average cost for long-term and short-term gains in separate buckets. But this method is rarely used because it’s extremely complex from an accounting standpoint.
The simpler “average cost, single category” method allows you to figure the cost of the entire holding, divide by the number of shares owned and come to an average cost before making your first sale. You then subtract this average cost from the sales proceeds to determine your gain or loss. This method provides the simplest way to handle mutual fund sales when you’re reinvesting dividends and/or regularly adding to your holdings.
There’s one major downside to using this method: If you choose it for your first sale, you must continue to use that method for every subsequent sale until you completely liquidate the holding. Additionally, opting for specific identification might save you money.
Let’s say, for example, that you buy mutual fund shares each month through an automatic investment plan. One month the shares might be up; the next month they might be down. You pay little mind and just invest the same amount each month, a process called “dollar-cost averaging.”
To keep it simple, assume your lowest-cost shares were the first purchased at $10, your highest-cost shares were purchased at $100 and your average cost was $50. We won’t factor in commissions here. You have 1,000 shares.
Now the market value of these fund shares is $60 and you want to sell 100 shares. Let’s compare three ways your sale could play out. You could use the first in, first out tactic and sell your lowest-cost fund shares. You could go with average cost, single category, which would simply use the average per-share price. Or you could use specific ID and sell your highest-cost shares.
As you can see in the table below, depending on the accounting method you choose, you can book a modest capital gain—or it might be more advantageous to take a loss.
Choosing a method.
The best accounting method to choose depends on you. If you have modest holdings and don’t want to keep close track of when you bought and sold shares, using the average cost method with fund-share sales and the FIFO method with the sale of individual stock shares is probably fine.
But if you’re a tax-sensitive investor, specific identification can potentially save you lots of tax money—especially if you use other tax-wise strategies, such as giving appreciated shares (rather than cash) to charity. You get credit for a charitable donation for the full market value of donated long-term shares, subject to certain income limitations, but because the charity is tax exempt, no one pays the capital gains taxes.
For more information about cost basis reporting, including a schedule of when you can expect to receive your most recent tax forms from Schwab, log in to your account here.
What you can do next.
Make sure that you’re considering the potential tax implications of your investments. Learn more about investment advice at Schwab. Talk to a financial professional. Find a Schwab Financial Consultant or visit a branch near you. If your tax situation is complicated, you may want to consult a tax professional.
Was this helpful?
A Schwab Financial Consultant can help you achieve your goals.
Related Content.
At Charles Schwab, we encourage everyone to take ownership of their financial life by asking questions and demanding transparency.
Our Insights & Ideas bring you information that fosters that ownership, because we believe that the best outcomes in life come from being fully engaged.
Want to know more? Talk with your Schwab Financial Consultant or call 800-355-2162.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment or tax advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.
Brokerage Products: Not FDIC Insured • No Bank Guarantee • May Lose Value.
The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC), offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides deposit and lending services and products. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons.
This site is designed for U. S. residents. Non-U. S. residents are subject to country-specific restrictions. Learn more about our services for non-U. S. residents.
© 2017 Charles Schwab & Co., Inc, All rights reserved. Member SIPC. Unauthorized access is prohibited. Usage will be monitored.
Комментарии
Отправить комментарий