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The Greenleaf Guide
March 2010 Newsletter |
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Question
If I sell a mutual fund to claim a loss on my tax return, do I need to be careful about how I invest the proceeds?
Answer
Although the global stock and bond markets came roaring back in 2009, many investors still have not recovered their former investment values. In such times, the consolation prize is the ability to use investment losses to offset taxable investment gains and consequently lower investment taxes.
The ability to deduct an investment loss is only valid in taxable brokerage or mutual fund accounts, not in IRAs or workplace plans. Under non-IRA circumstances, however, investors must be careful that they don't accidentally wipe out their deductible losses.
Specifically, the IRS' "wash-sale" rules will disallow your loss if you re-buy the same mutual fund -- or a substantially identical fund -- within 30 days before or after the sale. In other words, if you sell Vanguard's S&P 500 Index Fund and buy Schwab's S&P 500 Index Fund two weeks later, then you will not be able to deduct the loss on the Vanguard shares.
The same rule applies to individual stocks. Also, don't think you can pull a fast one on the IRS. A married filing jointly taxpayer is a single taxpayer to the IRS. Therefore, buys and sales in individually titled accounts for separate spouses could also disallow losses under the wash sale rules. |
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Unearthing a Stock's Cost Basis
Investors and accountants face cost-basis quandaries every year. Stock that you inherited two decades ago in certificate form was finally sold, for example, or there are no records of the purchases you made in a direct reinvestment program. In both cases, records related to your starting value are long gone. Another common circumstance is stock that was transferred to a new brokerage account, but the old firm didn't report cost basis details to the new firm.
Regardless of the circumstances, you have to come up with your cost basis to report your capital gain (or loss) on schedule D of the federal 1040.
How can you find out what you paid so that you only pay taxes on the earnings?
Contact the Original Brokerage Firm
Both full-service and discount brokerage firms must keep records for six years. Even if your stock purchase is older than that, ask anyway as some firms may be able to go back further. Expect a small fee to provide you with a duplicate statement from more than a few years ago.
Try An Online Resource
If you know the date that you bought (or inherited) the shares, use the "Historical Quotes" tab on www.bigcharts.com. In most cases, however, Big Charts does not have prices prior to the mid-1980s.
Use the Company's Information
Some companies, such as AT&T -- which is notorious for the many mergers and acquisitions that led up to its current incarnation -- have web pages for investors to help them untangle their original cost information. Others will show stock split and dividend histories online.
Another resource is the company's shareholder services department, which may be able to answer share price questions.
Estimate Dates
What if you don't know the specific date that you inherited stock, but can recall that your grandfather died in January 2000 and that you received shares upon his death? In that case, look up the closing price for each trading day in January 2000 and use the average of those days. Be sure to document your method, though, in the event you are audited. |
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