What’s My Basis?

From Steven Kutz: “My grandfather has given me some stocks (five different ones), and when I asked him what he bought them at, he said he’s had them for a long time, and they’ve split, etc., so he doesn’t know what they were bought at. He said that I should just use the price of the stocks when he gave them to me as their costs. But that means that no one will pay for a gain if, say, one of them has gone from ten dollars (what he bought it at) to sixty dollars (what it was when he gave it to me). Can I do what he suggests? If no, and he doesn’t give me the price he bought them at, what should I do about the tax basis when I sell them?”

Good question. And, no, you can’t just use as your “basis” the prices of the stocks as of the date he gave them to you. You’re quite right about that. Only if he had died and willed them to you could the basis have been “stepped up.” The good news is that he’s alive and well. The bad news is that the IRS will expect you to make reasonable efforts to use the proper cost basis.

If you were given actual stock certificates, you will see on each the date of transfer, and you can get the price (adjusted for splits) as of that date. Otherwise, ask your grandfather to take a guess as to when he acquired them — he’s likely at least to know the decade, and his broker is likely to know what year his account was established (if he purchased the stocks through that broker). Unless we’re talking about big numbers, I wouldn’t spend a LOT of time on this, but you should at least come up with some vague notion — 1950? 1965? 1980? Pick a date, any date, and make a note in your records that this is your best guess.

Then, either by calling each of the five companies, and their shareholder relations departments, or by some other clever method, you can come up with a price for that date. (ValueLine, in the library, will show prices, and splits, going back 15 years, if it’s one of the 2000 stocks they cover . . . and if you then find a ValueLine from 1981, you could go back yet another 15 years.)

When you sell the stocks, use the date you chose as the “acquisition date” you report and, if you want to be really correct about it, include a note explaining the problem and why you chose the date you did. But — especially if you’ve gone about this in good faith — I wouldn’t raise that flag. I’d just declare my gain, using my good faith best guess, and pay tax on it. It’s highly unlikely you’d ever have to explain any of this to the IRS.