Adjustments to Basis

Stocks, bonds, and collectibles are not subject to depreciation deductions, unlike real estate investments and assets used in your trade or business. However, you may need to make some other types of adjustments to the tax basis of this kind of asset while you hold it.

If you deducted the amortization of bond premiums, the deductions will reduce your basis in the bond. Conversely, if you were required to report original issue discount (OID) as income you should increase the basis of the bond to reflect the amounts you included as income.

If you received corporate dividends in the form of stock, the additional shares (or fractions of shares) were not taxable when you received them, but as a result of the distribution, you will have to recompute your basis in the shares you own. A similar computation is necessary if stock that you own splits. Basically, to compute the new basis of your shares, you take your existing basis in the investment, and divide it among the shares you now own as a result of the distribution or split.

Example Flo Plummer originally bought 100 shares for a net $50 per share after commissions, so her original basis for the investment is $5,000. After several years the shares split 3-for-2, and she now has 150 shares. Her total basis has remained the same -- $5,000 -- but since it is now spread over more shares, her basis in each share is $33.33.

Reinvested shares. If you participate in a dividend reinvestment plan of a corporation or a mutual fund, don't forget to add the amount of all your reinvested dividends over the years to the basis of your investment. Otherwise, you'll be taxed twice on the dividends: once when you receive them as income, and once when you sell them as capital gains.

© 2024 Wolters Kluwer. All Rights Reserved.