One of the most overlooked areas of tax savings is understanding how realized gains and losses impact your taxes. When you sell an investment, calculating cost basis and good record keeping plays a vital role in controlling those savings now and in the future.
To confuse things the IRS made several cost basis reporting changes. It revamped stock basis reporting in 2011, followed by changes in mutual fund, ETF, and DRIPs (Dividend Reinvestment Plans) in 2012.
Some say it makes the process easier. Which it does. Really, it enforces accuracy so nobody fudges their numbers. Good or bad, the changes force you to make cost basis accounting decisions at the time of sale. This is easy enough when you sell all the shares of stock.
But it doesn’t always work out that way. Maybe you want to sell half your shares. Maybe there are reinvested dividends to account for now and the intricacies of mutual fund shares, reinvested distributions, and return of capital. Or you just want to rebalance your portfolio. In other words, it’s complicated.
How you report cost basis directly affects your tax bill, which is the point of this guide. It’s also a big piece of a tax-efficient investment strategy. That is where you can save money by knowing the rules and planning ahead for taxes. Continue Reading…
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