Records such as receipts, canceled checks, and other documents that prove an item of income or a deduction appearing on your return should be kept at least until the statute of limitations expires for that return. Usually this is three years from the date the return was due or filed, or two years from the date the tax was paid, whichever is later. There is no period of limitations when a return is false or fraudulent or when no return is filed. You should keep some records indefinitely, such as property records, since you may need them to determine the basis of the property if it to prove the amount of gain or loss if the property is sold. For more details, refer to Publication 552 Recordkeeping for Individuals, or Tax Topic 305 on Recordkeeping.

If you are an employer, you must keep all your employment tax records for at least four years after the tax is due or paid, whichever is later. For additional information, refer to Publication 583, Starting a Business and Keeping Records. People in business often have expenses for travel, entertainment, and gifts. The documentation you should keep for each of these expenses can be found in Publication 463, Travel, Entertainment, Gift and Car Expenses.

References:

• Publication 463, Travel, Entertainment, Gift and Car Expenses
• Publication 552, Recordkeeping for Individuals
• Publication 583, Starting a Business and Keeping Records
• Tax Topic 305, Recordkeeping

To figure the basis of property you receive as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and the amount of any gift tax paid on it.

If the FMV of the property was less than the donor's adjusted basis, your basis for figuring gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustment to basis during the period you held the property. Your basis for figuring loss on its sale or other disposition is its FMV at the time you received the gift plus or minus any required adjustment to basis during the period you held the property.

If the FMV of the property was equal to or greater than the donor's adjusted basis, your basis for figuring gain or loss on its sale or other disposition is the same as the donor's adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.

For further complete information, refer to Publication 17, chapter 14, Basis of Property.

For additional information on this subject see Gifts.

References:

• Publication 17, Your Federal Income Tax

When you trade stock in one corporation for stock in another as part of a merger or other qualifying reorganization, you may have a nontaxable exchange. The basis of the stock you received is generally the same as the basis of the old stock, increased by any gain recognized on the exchange (including gain that is treated as a dividend) and decreased by the value of property or money received.

You may receive cash or something of value instead of a fractional share if the number of shares of new stock doesn't divide evenly into the number of shares of the old stock. You treat this as a sale of the fractional share.

Your basis in the new stock is determined, in whole or in part, by your basis in the old stock. Your holding period for the new stock will include the holding period for the old stock, provided that the old stock was held as a capital asset at the time of the exchange. For special basis rules relating to incentive stock options and options granted under employee stock purchase plan see Revenue Ruling 80-244, in IRS 1980-2 Cumulative Bulletin at page 235.

Refer to Publication 550, Investment Income and Expenses.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

When the old stock and the new stock are identical the basis of the old shares must be allocated to the old and new shares. Thus, you generally divide the adjusted basis of the old stock by the number of shares of old and new stock. The result is your new basis per share of stock. If the old shares were purchased in separate lots for differing amounts of money, the adjusted basis of the old stock must be allocated between the old and new stock on a lot by lot basis.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

You need to determine what your basis is in the company stock on the date of the split. The new shares assume part of your basis in the company stock on that date. You must divide the adjusted basis in the old stock by the number of shares of old and new stock. The result is your basis for each share of stock.

For example, if you owned two shares of company stock with a basis in one at $30 and the other $45, and the company declares a three for one stock split, you now have six shares of stock. Three of the shares will have a basis of $10, and three will have a basis of $15.

Because this is an Employee Stock Option Plan, you may have to report some or all of the gain on the sale of this stock as ordinary income (wages). For more information about employee stock option plans, see Publication 525 , Taxable and Nontaxable Income.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses
• Publication 525 , Taxable and Nontaxable Income

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.

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.

The taxpayer has the burden of proving the basis of property. Failure to prove cost results in a basis determined by the IRS or even a basis of zero.

Except for certain mutual fund shares, you cannot use an average price per share to figure the gain or loss on the sale of stock.

Refer to Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550, Investment Income and Expenses .

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses
• Publication 552 , Recordkeeping for Individuals

If you can identify which shares of stock you sold, your basis is what you paid for the shares sold (plus sales commissions). If you sell a block of the same kind of stock, you can report all the shares sold at the same time as one sale, writing VARIOUS in the "date acquired" column of Form 1040, Schedule D (PDF). However, what you enter into the "cost or other basis" column is the total of all the acquisition costs of the shares sold.

If you cannot adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is the basis of the shares you acquired first (first-in first-out). Except for certain mutual fund shares, you cannot use the average price per share to figure gain or loss on the sale of stock.

For more information, refer to Publication 550, Investment Income and Expenses.

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses
• Form 1040, Schedule D (PDF)

The average basis method may be used only for mutual fund shares that were purchased at various times for various prices if the shares are left in the custody of a custodian or agent in an account maintained for the acquisition or redemption of the shares.

References:

• Publication 564, Mutual Fund Distributions

The basis of the stock you sold is the cost of the shares plus any adjustments, such as sales commissions. If you have not kept detailed records of your dividend reinvestments, you may be able to reconstruct those records with the help of public records from sources such as the media, your broker, or the company that issued the dividends.

If you cannot specifically identify which shares were sold, you must use the first-in first-out rule. This means that you deem that you sold the oldest shares first, then the next oldest, then the next-to-the-next oldest, until you have accounted for the number of shares in the sale. In order to establish the basis of these shares, you need to have kept adequate documentation of all your purchases, including those that were through the dividend reinvestment plan. You may not use an average cost basis. Only mutual fund shares may have an average cost basis.

Refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.

References:

• Publication 550, Investment Income and Expenses
• Publication 551, Basis of Assets
• Tax Topic 404, Dividends

Unless you sell all of your shares at one time, your total basis, which includes both your original purchase and any purchases through a dividend reinvestment, is not the figure used to report the sale of shares. If you sell less than all of your shares at one time, you need to have kept adequate documentation of all your purchases, including those that were through the dividend reinvestment plan in order to establish the basis of the shares sold. You may not use an average cost basis. Only mutual fund shares may have an average cost basis.

When reporting the sale of shares of stocks, the basis for the calculation of gain or loss is the actual cost (plus adjustments, such as sales commissions) of those shares. If you cannot specifically identify which of your shares were sold, you must use the first-in first-out rule.

For more information, refer to Publication 550, Investment Income and Expenses, and Publication 551, Basis of Assets.

References:

• Publication 550, Investment Income and Expenses
• Publication 551, Basis of Assets
• Tax Topic 404, Dividends

After you report the dividends as income, you have basis in the shares acquired through dividend reinvestment. When you report the sale of the shares, you will be taxed only on the amount that the sales proceeds (minus commissions) exceed your cost basis (in this case, the amount of the dividends reinvested).

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 404, Dividends

If the special holding periods are met, generally treat gain or loss from the sale of the stock as capital gain or loss. However, you may have compensation income if:

You must hold the stock for more than 2 years from the time the stock option is granted to you and for more than 1 year from when the stock was transferred to you. If you meet the holding period requirement and the option price was below the fair market value of the stock at the time the option was granted, you report the difference as compensation income (wages) when you sell the stock. Generally, this compensation income cannot be more than your gain on the sale. If your gain is more than the amount you report as compensation income, the remainder is a capital gain reported on Form 1040, Schedule D (PDF). If you sell the stock for less than the amount you paid for it, your loss is a capital loss, and you do not have any ordinary income.

For more information, refer to Publication 525, Taxable and Nontaxable Income, and Publication 551, Basis of Assets.

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 551, Basis of Assets
• Form 1040, Schedule D (PDF), Capital Gains and Losses

The compensation income is reported on line 7 (wages, salaries, tips, etc.) of Form 1040. It is added to the stock's basis used when determining capital gain or loss on the sale of the stock. Any capital gain or loss on the stock sale is reported on Form 1040, Schedule D (PDF), Capital Gains and Losses.

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

If you are able to defer the reporting of gain or loss until the year the short sale closes, the following will allow you to reconcile your Forms 1099-B to your Schedule D and still not recognize the gain or loss from the short sale:

For more on these rules and exceptions that may apply, refer to Chapter 4 of Publication 550, Investment Income and Expenses.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

In general, you cannot determine your gain or loss until you purchase the stock that you are going to deliver to close the short sale. You still need to report the gross proceeds on Schedule D so that the total of lines 3 and 10, column (d), reconciles with all of your Forms 1099-B.

Also, in columns b and c write "short sale." In column f, write "see attached statement." In the statement, explain the details of the short sale and that it is not closed. Include your name as it appears on your return and your social security number.

For more information on rules and exceptions that may apply, refer to Chapter 4 of Publication 550, Investment Income and Expenses.

References:

• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

With either of the two types of statutory employee stock option plans, there is no income as a result of the granting of the option or the exercising of the option (purchasing stock). These two types of plans are the employee stock purchase plan and the incentive stock option plan. However, if you don't hold the stock long enough to meet the holding period requirements, when the stock is sold you may have to report compensation income (wages). The split will affect the computation of capital gain and compensation income, if any.

For the stock purchased under an employee stock purchase plan to receive favorable tax treatment, it must be held for at least two years after the stock is granted and at least one year after the stock is transferred to you. If the holding periods are not met, the lesser of the fair market value of the stock on the grant date minus the option price or the fair market value on the sale date minus the amount you paid for the stock is compensation income (wages). To the extent that the gain is being taxed as wages on your return, it becomes part of your adjusted basis in the stock sold. When determining basis, the amount you paid for the stock is divided equally among the shares received in the split.

For information on incentive stock option plans and nonstatutory stock options, or more information on employee stock purchase plans, refer to Publication 525, Taxable and Nontaxable Income

References:

• Publication 525, Taxable and Nontaxable Income
• Publication 550, Investment Income and Expenses
• Tax Topic 409, Capital gains and losses

Reverse splits are where your number of shares in a company's stock decreases. Your total basis remains the same; it is your per share basis that increases. You must divide your basis in the old shares by the number of new shares. For example, you own 4 shares of stock. Two of these shares have a basis of $15; each of the other two have a basis of $20 each. There is now a one for two reverse split. Now you have two shares. One has a basis of $30 the other has a basis of $40. If your receive cash because of the sale of a fractional share you have a capital gain or loss that is reported on Form 1040, Schedule D (PDF) , Capital Gains and Losses . Please see Fractional Shares in Publication 550, Investment Income and Expenses , for further information on the sale of a fractional share.

References:

• Publication 550, Investment Income and Expenses
• Form 1040, Schedule D (PDF)
• Tax Topic 409, Capital gains and losses

You would have to report any capital gains realized on the sale. Even assuming this transaction meets the requirements of an exchange, rather than a sale, the exchange of shares of one fund for those of another is a taxable exchange. This is true even if both funds are within the same family of funds.

References:

• Publication 564, Mutual Fund Distributions

Yes, you report the sale of your shares on Form 1040, Schedule D (PDF), Capital Gains and Losses. Generally, whenever you sell, exchange, or otherwise dispose of a capital asset, you report it on Schedule D.

If the share price were constant, you would have neither a gain nor a loss when you sell shares because you are selling the shares for the same price you purchased them.

If you actually owned shares that were later sold, the fund or the broker should have issued a Form 1099-B There is no requirement with that form that there be gain or loss on the sale, only a sale or exchange of an investment asset and sales proceeds.

References:

• Publication 564, Mutual Fund Distributions