What To Do With Missing Cost Basis

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In the investing world, the term “cost basis” means the original purchase price of an asset. Although there are some circumstances where the cost basis can be adjusted, such as a so-called step up to date of death or adjustments due to like-kind exchanges like a 1031 exchange or stock exchange, most of the time cost basis is based on the value on the date of purchase.

Knowing the cost basis of an asset allows the owner to track the performance of the asset and determine the tax consequences of selling the asset.

If the current value of the asset is greater than the value when the asset was purchased, the difference between the current value and the value at purchase is referred to as a capital gain. On the other hand, if the current value of the asset is less than the value when the asset was purchased, the difference between the current value and the value at purchase is known as a capital loss.

It wasn’t until 2011 that the government passed a rule which required custodians to keep track of and report on the cost basis of most securities. This rule is recent enough that it is still common for some clients with older assets to have missing or incomplete cost basis information.

It is particularly important to know the cost basis of an asset when it is held in a taxable account where capital gains and losses are subject to tax when the capital gain or loss is realized at the time of sale.

If you have cost basis information missing in a taxable account, it is important to work with your custodian on correcting the missing information. By default, they will report a cost basis of $0, which is a gain of 100%, unless you provide them with a better guess.

Good places to start for finding your missing cost basis are trade confirmations or other financial records from your prior custodian. If you do not have any good records, then you can strive to recreate the cost basis using historical data. Generic advice for this type of reconstruction is to err on the side of a lower cost basis, meaning more capital gains tax owed. It will ultimately be the opinion of an IRS auditor on whether your calculation is reasonable.

When you are missing the cost basis of assets in taxed-advantaged accounts like individual retirement accounts (IRAs), normally you can leave the cost basis as missing. IRAs are not subject to capital gain taxation and therefore you can typically sell the holding within the retirement account without consequence.

If you are wondering what the cost basis of your securities are now, you can usually find the cost basis your custodian has on record using their online banking tool. For Charles Schwab, you can follow our guide “How to View Realized Capital Gains and Losses on Schwab.com” to find it.

Photo by Debby Hudson on Unsplash

Follow Libby Horbaly:

Wealth Manager

Libby Horbaly is a Wealth Manager at Marotta Wealth Management. In addition to writing articles, she is one of our primary editors and image selectors for Marotta on Money. In her spare time, she enjoys reading, sailing, and spending time with her family.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.