Cost Basis Calculations
The IRS requires you to report cost basis on certain property transactions, including sales, exchanges, gifts, inheritances, and losses. If you don’t know what it is, you’re probably confused about how to calculate it. You might think “cost basis” means “the amount I paid for my house,” but it doesn’t. Instead, it refers to the price you paid for an asset minus any depreciation you’ve taken over time.
The cost basis of stock options is the amount you paid for the shares when you bought them. You can use it to determine what portion of the shares’ value came from your initial investment and what portion came from the market.
A tax attorney has prepared the article below to provide information regarding the basis. Please remember that this is not legal advice, and it is recommended you consult directly with your tax attorney regarding your specific issues and questions.
To calculate the cost basis of your stock options, follow these steps:
1. Determine the total number of shares you purchased.
2. Multiply the price per share by the total number of shares.
3. Divide the total purchase price by the number of shares.
4. Subtract the resulting number from the current share price.
5. If the difference is negative, it indicates that the option had a loss. Otherwise, it indicates that the options had a gain.
Example Of Calculating Cost Basis
For example, you bought a $1 million home for $100,000. Your cost basis is $100,000. You sell the house three years later for $200,000. You’ll owe capital gains taxes on the difference ($100,000 – $100,000 $0).
You must figure out your cost basis for every item you sell, even if you use a professional real estate agent. So, if you buy a $5,000 car, you still have to include that expense in figuring out your cost basis.
If you’re selling a piece of property, you’ll want to subtract any outstanding mortgage balance from the sale price. For example, if you sold a house for $150,000 and had a mortgage of $50,000, you’d have a gain of $100,000 ($150,000 – $50,000 $100,000).
The same goes for stocks. If you sold shares of stock for $10 per share, you’d have a loss of $10 per share ($10 x 10,000 shares $100,000 loss). But if you sold those shares for $20 per share, you’d profit $10 per share ($20 x 10,000 shares).
What is Cost Basis?
Cost basis is the amount you pay to buy an asset. You might consider it the original price you paid for an item. If you purchased shares of XYZ Corp. at $10 per share, your cost basis would be $10 per share. This is the price you paid for the asset—the value of the stock at the moment you purchased it.
When you invest in a stock or mutual fund, your cost basis is usually the price you paid for that investment. For example, if you invested $1,000 into XYZ Corp., your cost basis would be the $1,000 you spent on the stock.
Understanding Cost Basis
Understanding the cost basis for an investment is essential for tax purposes – whether it’s a capital gain or a loss. You realize a loss if you sell an asset for less than what you paid. But how much did you pay for it? That’s where knowing the cost basis becomes helpful.
Generally, selling an asset and recognizing a profit or loss on the transaction is considered a taxable event, regardless of whether you are filing a personal or corporate income tax return. However, there are exceptions. For example, if you sold property used in your trade or business for $5,000 and realized a net loss of $10,000, you wouldn’t owe taxes on the entire $15,000. Instead, you’d only owe taxes on the $5,000 of profit. Similarly, if you sold a property for $100,000 and realized a $50,000 profit, you’d only owe half of the profits taxes on that amount ($25,000).
The IRS provides some guidance on determining the cost basis of an asset. You generally must use the purchase price of the asset minus depreciation deductions taken over the asset’s life. This figure represents the initial cost of the asset.
Tracking Cost Basis
There are many reasons why you might want to track what your cost basis is for investments. One reason is that it helps determine how much tax you owe on those investments. Another reason is to see whether you’re getting a good deal on your investment returns. You can use cost basis information to calculate net unrealized appreciation, which tells you how much money you’ve gained since you bought the asset. Cost basis information lets you figure out what you’ll pay in taxes when you sell the asset. For example, if you buy a home for $100,000 and later sell it for $150,000, you’d have to pay taxes based on the difference between the sale price ($150,000) and the purchase price ($100,000). But if you sold the same house for $200,000, you wouldn’t have to pay taxes on your profit.
Questions About Cost Basis? Contact The McGuire Law Firm
If you have questions relating to your basis in property and tax treatment through the sale or purchase of property, you may want to speak with a tax attorney or business attorney. Contact The McGuire Law Firm at (720) 833-7705.