Since the difference between short- and long-term capital gains taxation rates is so significant, you need to understand exactly when a security is considered purchased and when it is considered sold.
- The holding period begins the day after the security is purchased (not the settlement date).
- The holding period ends the day of the sale.
- It is important to keep detailed records of these dates, to ensure that a security is not sold too soon and thus qualifies for preferential tax treatment.
Merely knowing the tax rates is not enough for an investment adviser. A key concept to understand is cost basis, since the amount of capital gains to be taxed is calculated by subtracting the investor's cost from the sales proceeds. To determine the cost basis of an investment, start with the original price (plus any transaction costs). Next, add the dollar value of dividends that were reinvested. This would apply to both stocks in a dividend-reinvestment program and mutual funds where dividends are automatically reinvested. Reinvested capital gains are also added to the cost basis for mutual funds.
Cost basis = Original Price + transaction costs + reinvested dividends
, your cost basis is the value of the asset as of the decedent's date of death. This is known as a stepped-up cost basis. Also, the holding period is always considered long term, even if the deceased hadn't owned the investment for 12 months before death.
1 - The actual cost basis of the giver; and
2 - The market value on the date of the gift.
- The actual cost basis of the giver transfers to the receiver if the value of the asset is equal to or greater than what the giver first paid for it. This is known as carryover basis.
- The market value on the date of the gift comes into play if the investment had declined in value since the giver acquired it. For "loss property", there is what is known as double basis. The best way to explain how this works is to use an example. Let's say you are given shares of stock, and the original owner's cost basis was $70 a share. On the date of the gift, the shares are trading at $60. If you sell the shares in the future, the basis for a gain is $70 a share, and the basis for a loss is $60. If you sell the shares for a price between $60 and $70, you have neither a taxable gain nor a taxable loss. See the illustration below.
Value on date of gift Value at purchase
Taxable loss | Neither loss nor gain | Taxable gain
Netting Capital Gains and Losses and Wash Sales
Managing WealthUnderstanding equity cost basis is critical for tracking the gains or losses of an investment.
Managing WealthIn any transaction between a buyer and seller, the initial price paid in an exchange for a product or service will qualify as the cost basis. When it comes to securities and related financial ...
Managing WealthA stock’s cost basis is its purchase price plus all reinvested dividends and commissions.
Managing WealthThe term "cost basis" refers to the original value of a security you own. When you sell a stock, bond or mutual fund, you use the cost basis to determine your profit or loss, which in turn affects ...
MarketsAn investment’s cost basis is basically the total amount invested, plus any commissions.
ETFs & Mutual FundsLearn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
Financial AdvisorWhat financial advisors (and their clients) need to know about capital gains taxes in 2015.
Personal FinanceA step-up in basis is the increased cost basis of an inherited asset or other security.
MarketsA discussion of basis points as well as basis point calculations using Excel.
RetirementWe give you seven guidelines to help you keep more of your money in your pocket.