How to Calculate Stock Basis Rules

by Leslie McClintock

When you sell a stock at a profit in a taxable account, you are liable for capital gains taxes on the amount of money you made. However, in order to calculate your capital gains, you must know your tax basis in the stock. Your basis is the amount of money you have invested. However, you must adjust this basis for any dividends received, or administrative price changes such as stock splits.

Start with the share price at which you purchased the stock. That is your starting basis.

Increase your basis by any contributions of cash or property you made to the corporation. This is particularly true of S corporations, which are not publicly traded, but closely and privately held by 100 owners or less. Also include any stock purchases you made.

Subtract any taxable distributions of property or cash the corporation makes. Shareholders will find this information on their IRS Form K-1s, which helps you and the IRS track changes in basis.

Subtract the value of any business expenses or losses that the company incurred. Limit these adjustments to non-deductible expenses. If the expense is deductible, you do not receive credit for tax basis.

Subtract the adjusted basis of any charitable donations the company made. Specifically, you must adjust by the difference in the company's tax basis in a property and its fair market value, or FMV. For example, if the company donates a car to charity, and has a basis of $10,000 in the car, and the company donates it at a value of $8,000, it does not get to deduct $8,000 from its earnings for the year. Instead, the car is worth a $2,000 reduction in basis -- the difference between the company's basis in the car and its fair market value.

Adjust for splits. Sometimes a publicly traded company will "split" a share of stock costing $20 per share into two shares of stock at $10 per share. The dollar amount of your cost basis for your investment as a whole does not change -- but your cost basis per share changes when this happens.

Account for stock dividends. If you receive a stock dividend, divide your total basis among all the shares you have, after the dividend. Total basis doesn't change, but basis per share changes.


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