Adjusted Basis
Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or
amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. The result of these adjustments to the
basis is the adjusted basis.
Adjustments to the basis of stocks and bonds are explained in the following discussion. For information about other adjustments to basis, see
Publication 551.
Stocks and Bonds
The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer
fees. If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted
basis as discussed earlier under Basis Other Than Cost.
The basis of stock must be adjusted for certain events that occur after purchase. For example, if you receive more stock from nontaxable stock
dividends or stock splits, you must reduce the basis of your original stock. You must also reduce your basis when you receive nontaxable
distributions, because these are a return of capital.
Identifying stock or bonds sold.
If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock
or bonds.
Identification not possible.
If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the
securities you sell is the basis of the securities you acquired first. Except for certain mutual fund shares, discussed later, you cannot use the
average price per share to figure gain or loss on the sale of the shares.
Example.
You bought 100 shares of stock of XYZ Corporation in 1989 for $10 a share. In January 1990 you bought another 200 shares for $11 a share. In July
1990 you gave your son 50 shares. In December 1992 you bought 100 shares for $9 a share. In April 2002 you sold 130 shares. You cannot identify the
shares you disposed of, so you must use the stock you acquired first to figure the basis. The shares of stock you gave your son had a basis of $500
(50 × $10). You figure the basis of the 130 shares of stock you sold in 2002 as follows:
| 50 shares (50 × $10) balance of stock bought in 1989 |
$500 |
| 80 shares (80 × $11) stock bought in January 1990 |
880 |
| Total basis of stock sold in 2002 |
$1,380 |
Adequate identification.
You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or
for a certain price were delivered to your broker or other agent.
Broker holds stock.
If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you:
- Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and
- Receive a written confirmation of this from your broker or other agent within a reasonable time.
Single stock certificate.
If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate
identification if you:
- Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other
agent, and
- Receive a written confirmation of this from your broker or other agent within a reasonable time.
Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other
agent.
If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate
identification if you keep a written record of the particular stock that you intend to sell.
Bonds.
These methods of identification also apply to bonds sold or transferred.
Shares in a mutual fund or REIT.
The basis of shares in a regulated investment company (mutual fund) or a real estate investment trust (REIT) is generally figured in the same way
as the basis of other stock.
Mutual fund load charges.
Your cost basis in a mutual fund often includes a sales fee, also known as a load charge. But, in certain cases, you cannot include the entire
amount of a load charge in your basis if the charge gives you a reinvestment right. For more information, see Publication 564.
Choosing average basis for mutual fund shares.
You can choose to use the average basis of mutual fund shares if you acquired the shares at various times and prices and left them on deposit in an
account kept by a custodian or agent. The methods you can use to figure average basis are explained in Publication 564.
Undistributed capital gains.
If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference
between the amount you included and the amount of tax paid for you by the fund or REIT. See Undistributed capital gains of mutual funds and
REITs under Capital Gain Distributions in chapter 1.
Automatic investment service.
If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other
agent is the purchase price plus a share of the broker's commission.
Dividend reinvestment plans.
If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value
of the stock on the dividend payment date. You must include the amount of the discount in your income.
Public utilities.
If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in
that stock is zero.
Stock dividends.
Stock dividends are distributions made by a corporation of its own stock. Generally, stock dividends are not taxable to you. However, see
Distributions of Stock and Stock Rights under Nontaxable Distributions in chapter 1 for some exceptions. If the stock dividends
are not taxable, you must divide your basis for the old stock between the old and new stock.
New and old stock identical.
If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis
of the old stock by the number of shares of old and new stock. The result is your basis for each share of stock.
Example 1.
You owned one share of common stock that you bought for $45. The corporation distributed two new shares of common stock for each share held. You
then had three shares of common stock. Your basis in each share is $15 ($45 ÷ 3).
Example 2.
You owned two shares of common stock. You had bought one for $30 and the other for $45. The corporation distributed two new shares of common stock
for each share held. You had six shares after the distribution - three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15
each ($45 ÷ 3).
New and old stock not identical.
If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is
calculated differently. Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot
of stock to the total fair market value of both lots on the date of distribution of the new stock.
Example.
You bought a share of common stock for $100. Later, the corporation distributed a share of preferred stock for each share of common stock held. At
the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. You figure the
basis of the old and new stock by dividing your $100 basis between them. The basis of your common stock is $75 ($150/$200 × $100), and the basis
of the new preferred stock is $25 ($50/$200 × $100).
Stock bought at various times.
Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the
share of the stock dividends due to it.
Taxable stock dividends.
If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. The basis
of your old stock does not change.
Stock splits.
Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held.
Stock rights.
A stock right is a right to acquire a corporation's stock. It may be exercised, it may be sold if it has a market value, or it may expire. Stock
rights are rarely taxable when you receive them. See Distributions of Stock and Stock Rights under Nontaxable Distributions in
chapter 1.
Taxable stock rights.
If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. The basis of the old
stock does not change.
Nontaxable stock rights.
If you receive nontaxable stock rights and allow them to expire, they have no basis.
If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of
the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. Use a ratio of
the fair market value of each to the total fair market value of both at the time of distribution.
If the fair market value of the stock rights was less than 15%, their basis is zero. However, you can choose to divide the basis of the old stock
between the old stock and the stock rights. To make the choice, attach a statement to your return for the year in which you received the rights,
stating that you choose to divide the basis of the stock.
Basis of new stock.
If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised.
Example.
You own 100 shares of ABC Company stock, which cost you $22 per share. The ABC Company gave you 10 nontaxable stock rights that would allow you to
buy 10 more shares at $26 per share. At the time the stock rights were distributed, the stock had a market value of $30, not including the stock
rights. Each stock right had a market value of $3. The market value of the stock rights was less than 15% of the market value of the stock, but you
chose to divide the basis of your stock between the stock and the rights. You figure the basis of the rights and the basis of the old stock as
follows:
| 100 shares × $22 = $2,200, basis of old stock |
|
| 100 shares × $30 = $3,000, market value of old stock |
|
| 10 rights × $3 = $30, market value of rights |
|
| ($3,000 ÷ $3,030) × $2,200 = $2,178.22, new basis of old stock |
|
| ($30 ÷ $3,030) × $2,200 = $21.78, basis of rights |
|
If you sell the rights, the basis for figuring gain or loss is $2.18 ($21.78 ÷ 10) per right. If you exercise the rights, the basis of the
stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2.18), or $28.18 per share. The remaining basis of the old stock
is $21.78 per share.
Investment property received in liquidation.
In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or
loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution.
S corporation stock.
You must increase your basis in stock of an S corporation by your pro rata share of the following items.
- All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a
shareholder.
- The nonseparately stated income of the S corporation.
- The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted.
You must decrease your basis in stock of an S corporation by your pro rata share of the following items.
- Distributions by the S corporation that were not included in your income.
- All loss and deduction items of the S corporation that are separately stated and passed through to you.
- Any nonseparately stated loss of the S corporation.
- Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital
account.
- The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted
basis of the wells.
However, your basis in the stock cannot be reduced below zero.
Specialized small business investment company stock or partnership interest.
If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the
stock or interest by the amount of any postponed gain on that sale. See Rollover of Gain From Publicly Traded Securities, later.
Qualified small business stock.
If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this
replacement stock by the amount of any postponed gain on the earlier sale. See Gains on Qualified Small Business Stock, later.
Short sales.
If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a
capital expense, and you must add it to the basis of the stock used to close the short sale.
See Payments in lieu of dividends, later, for information about deducting payments in lieu of dividends.
Premiums on bonds.
If you buy a bond at a premium, the premium is treated as part of your basis in the bond. If you choose to amortize the premium paid on a taxable
bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond.
Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. You must reduce the
basis of the bond by the premium you amortized for the period you held the bond.
See Bond Premium Amortization in chapter 3 for more information.
Market discount on bonds.
If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your
income. See Market Discount Bonds in chapter 1 for more information.
Acquisition discount on short-term obligations.
If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of
acquisition discount you include in your income. See Discount on Short-Term Obligations in chapter 1 for more information.
Original issue discount (OID) on debt instruments.
Increase the basis of a debt instrument by the amount of OID that you include in your income. See Original Issue Discount (OID) in
chapter 1.
Discounted tax-exempt obligations.
OID on tax-exempt obligations is generally not taxable. However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that
you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. The accrued OID is added to the basis of the
obligation to determine your gain or loss.
For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or
Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments.
If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term
obligations. See Discount on Short-Term Obligations in chapter 1.
Stripped tax-exempt obligation.
If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you
dispose of it. For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. You accrue the OID on these
obligations in the manner described in chapter 1 under Stripped Bonds and Coupons.
Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. Also increase your basis by the interest
that accrued (but was not paid, and was not previously reflected in your basis) before the date you sold the bond or coupon. In addition, for bonds
acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis.
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