How to calculate cost basis, absent records

[curiousgeorge]

Hello tax experts!

Selling shares of a Fidelity mutual fund bought in September 1997; all dividends and distributions re-invested. What resources available to calculate cost basis?

No records at all - statements, tax return copies all lost in residential moves. No records from a CPA or tax preparer – did not use any. Fidelity said they are not able to help because the account is not/never held by them. Being a Fidelity fund, even if account is not held by them - don’t they still earn money from the investment? If this is correct, one would think that they should help; it seems like an easily retrievable data from the fund’s database.

By the way - there is new law that requires 1099s include cost basis - when is this effective? What happens if none is available?

Thanks!

[mwcpa]

george, you have a pickle.....under the law it is your responsibility to keep track of your cost basis, without any evidence, upon audit the IRS will more than likely say it's zero... the new rules that start in 2012 may ease some of that responsibility, but if Fidelity does not know what you paid in 1997 for the fund today they also won't know the number on 1-1-12. One should still maintain evidence of cost for the period they own the shares plus at least three tax filings after they sell them (since the audit period is generally 3 years after filing, I often tell clients to keep them longer, like 6-7). I cannot tell you the number of times this becomes an issue. IRS article on the "new rules" www.irs.gov/newsroom/article/0,,id=217167,00.html, www.irs.gov/newsroom/article/0,,id=228907,00.html

normally, a mutual fund company that has had the fund in house has a record of your account, but if you bought it through a non fidelity firm they may not.....

How far back do you keep your tax records?

Do you remember or have record of the initial purchase in 1997?

You may need to work backward to determine the proper cost basis....

Start with 2010..... add up the reinvested dividend and capital gain distributions.... then go to 2009..... and so on.....

A "trick" if you are willing to spend the time and possibly money.... many tax professionals (CPA, EA or attorney) can be given a limited power of attorney and then they can log into the IRS website and obtain your "wage & income" data that was reported to the IRS (at least some of it). I often do this when I meet a long term non-filer that may have "lost" records and wants to get compliant with the law (nothing like having old tax returns prepared and then get a letter stating that $X in income was not reported). You can do the same things yourself.

Here is some IRS data / articles on the issue of cost basis in mutual funds

www.irs.gov/faqs/content/0,,id=199951,00.html

www.irs.gov/publications/p550/ch04.html#en_US_2010_publink100010354

www.irs.gov/pub/irs-pdf/p552.pdf

[curiousgeorge]

mwcpa - many thanks as always!

The 2011 1099-B will only include securities bought in 2011 - correct?
So if there are no dividends or distributions that would have 'purchased' more shares in 2011, 1099-B for the sale would not require a cost basis. Of course cost basis will still need to be in Schedule D. I'll have to do a manual calculation - I guess I can use the historical data in yahoo finance or some other source.

Someone in another forum mentioned "an amazing online tool which will automatically calculate and adjust your cost basis in seconds. It is used by brokerage firms and Fortune 500 companies and is now available to the public - www.netbasis.com " Have you heard about this?

[mwcpa]

be careful george, absent a statement from the brokerage house, the trade confirmation slip or any other written documentation historical data from yahoo finance or some other source will not be acceptable to the IRS (or the law). I find it hard to believe that fidelity, i assume you purchased it directly from them, cannot provide copies of statements from that far back, it may cost a fee, but normally they have the data (a number of clients of mine who did not keep the required records who did that).

the netbasis will not help you if you are trying to prove the cost basis of stock ABC when you have no details as you note. netbasis would be more of a tool to help to confirm complicated cost basis details. let's say a stock splits, like when old Ma Bell created a bunch of Baby Bells and no the Baby's have gotten married.... let say if I know that in 1970 I bought shares of old Ma Bell for 1,000, this tool would help you determine the cost of Verizon (if I read their literature correctly), back in the old days one would need to look it up written publication and that could take time (I remember having to do that and I still have quite a time when one of my clients finally sells on these things that they got from Grandma in an UGMA that is still titled as an UGMA even though they are 50 now)

Be careful.... I highly doubt the result you get from that or any company will be acceptable to the IRS in audit when you have no data.... remember the old saying Garbage In Garbage Out..... IRS will surely say that the lack of proof of the actual original purchase is problematic, you may get a compassionate agent who will negotiate or you may get a guy who follows the letter of the law and if that is the case, appeals and the courts will provide little relief for you (in my opinion)

Other casual readers should understand that the law requires that you maintain records of the purchases (and dividend/capital gain re-investments) of your stocks, bonds, mutual funds, etc that are held in taxable accounts. (In your IRA this is not needed for tax purposes, but can be used to evaluate your investments). Keep those annual (at minimum) mutual fund statements for as long as you hold the fund, plus for a period of at least 3 tax filings after you sell them. For stocks, keep the buy slip or if your broker gives you a statement that shows cost basis, keep at least the annual one that shows all transactions. In these days of "tax gap," deficits, governments need for more and more money and given the fact the IRS knows many fudge cost basis, even in these days of 15% tax long term gains tax, when your schedule D is audited it's up to you to prove things..... (in my 20+ year career I only had one client have a schedule D audit.... what a pain in the neck..... )

[rangerj]

See section 6001 and the regulations section 1.6001 regarding the statutory requirement for taxpayers to maintain records of income and expense. The burden of proof with respect to income is on the government. The IRS has taken the position that income reported on an information document, e.g. a 1099 or W-2, is sufficient to meet the burden of proof and the courts have agreed with the government. The burden of proof with respect to deductions is on the taxpayer. The reduction of a sale by the cost basis (cost of goods sold) is a deduction and the burden of proof is in the taxpayer, that is the person who was involved in the transactions and in control of the records. The government was not involved in the transactions and has no way of knowing what was paid for an asset, if anything. An asset may be purchased, stolen, received by gift or inheritance, of as part of a trade (bartered for), etc. all of which could result in a different amount for "basis". A reasonable reconstruction of basis MAY be accepted by a government auditor if the amounts are backed up by some reliable evidence and/or testimony (seller, gift giver, witness, etc.). As a paid tax professional subject to IRS Circular 230 and the tax code as well as the AICPA ethics provisions I cannot and would not prepare a tax return with any basis other than zero if there is a total lack of documentation. Given the financial crisis the government is going to be applying penalties, including preparer penalties, in volume. Paid tax return preparers beware.

[curiousgeorge]

Thanks everyone!
Very low income - always been underemployed - always lived very simply within means. Little money in fund was a gift from non-citizen, now deceased. Have resisted selling until the big rainy day, which unfortunately is here and need to sell for a temporary band-aid.
But now, almost looks like selling can raise a red flag and the bleeding will be worse.

Merry, merry... and have a Healthy, Wonderful New Year!

[Deleted]

Dec 23, 2011 6:29:30 GMT -5 curiousgeorge said:

Thanks everyone!
Very low income - always been underemployed - always lived very simply within means. Little money in fund was a gift from non-citizen, now deceased. Have resisted selling until the big rainy day, which unfortunately is here and need to sell for a temporary band-aid.
But now, almost looks like selling can raise a red flag and the bleeding will be worse.

Merry, merry... and have a Healthy, Wonderful New Year!

If you are very low income, and this is a small fund just consider the entire fund as taxable. Should not increase your liablilty much, if any.

[mwcpa]

good point archie....

without all of the facts the special 0% capital gains tax rate is still good law for 2011.....for those who qualify.....

[rangerj]

Note: The reason the brokers will be required to report "basis" is that Congress determined that far to many taxpayers were overestimating their basis and under reporting their gains.

[Savoir Faire-Demogague in NJ]

The brokerage firm should have this information. A few years ago I sold 10s of thousands of shares of a mutual fund that I started acquiring positions is on a monthly basis in the early 90s, including monthly interest that was rolled back into buying fund shares.

I had dozens and dozens of 1099 pages showing each lot, cost and sale price.

[curiousgeorge]

Thank you all.

mwcpa says "You may need to work backward to determine the proper cost basis....Start with 2010..... add up the reinvested dividend and capital gain distributions.... then go to 2009..... and so on....."

Not bought from Fidelity; brokerage firms have changed due to mergers etc over the years.

mwcpa's suggestion above sounds reasonable. $ amount spent in mm/yyyy is known. Statements from 2009 are available - can work backwards from them.

Low income after std deduction and 1 exemption is in 10% income tax rate. But the 0% cap gains tax would not apply if the cap gains amount raises the total income to a much higher rate - right?

BTW - what are the cap gains rates for tax year 2012?

Thanks again. Happy Healthy New Year!

[mwcpa]

"BTW - what are the cap gains rates for tax year 2012?"
Same as 2011

without actual numbers i do not want to state whether of not you get the 0% special capital gains rate.... but for argument sake.... lets say you have NO income except a 100K long term capital gain, you are married and rent and living in a no tax state..... your tax would be $2,910....

throw in a 20K salary and now the tax is $6,753....

From my friends at CCH...

"General rate. The general tax rate for net capital gains depends on the year and the taxpayer's tax bracket.

•For taxpayers above the 15-percent bracket (that is, taxpayers in the 25-, 28-, 31- and 35-percent brackets), the general long-term capital gain rate is 15 percent.

•For taxpayers in the 10- and 15-percent brackets, the general long-term capital gain rate is five percent for tax years beginning before 2008, and zero for tax years beginning after 2007 and before 2013"

the applicable section of the law is Internal Revenue Code Section 1(h) (Maximum Capital Gains Rate).