As an investor relations specialist working with public companies, I sometimes get calls from individuals who have stock they would like to sell, but they don't know the cost basis in the shares. This situation can occur for any number of reasons: they may have received the stock as a gift or as part of an inheritance, they may be helping out a relative who found an old stock certificate in a safe deposit box, or they may have owned the shares for so long that they no longer have the purchase records. While each situation must be handled differently, there are a number of suggestions I can make to try to help them deal with this issue.
Evaluate the Situation
I would start by understanding the cost-basis issue as it applies to the stock. For a gift of stock, the giver's cost basis carries over, so I would ask the giver for any records on the purchase. The same applies to a stock certificate--my first step would be to try to obtain any information about when and how it was acquired. Inherited stock is the easiest, since its basis is the share price when it was received from the estate.
Estimate the Tax
Doing the research to determine a stock's costs basis can be time consuming and difficult, so before plunging ahead, I would estimate the taxes based on a worst-case cost basis of $0. If the current value of the shares isn't that great, the tax bill may be modest, in which case paying the taxes, keeping the rest of the sale proceeds, and avoiding the hassle of trying to come up with an accurate cost figure might make sense. This could be a good option if there is little or no information on when and/or how the shares were obtained.
Contact a Broker
If I had no records for the stock purchase, I would contact the brokerage firm through which the shares were purchased. They may be able to help me track down old records that show when the shares were purchased and at what price.
Call the Investor Relations Department
For shares of a public company, I would also contact its investor relations department. Among other things, its investor relations professionals will be able to provide information that is essential to arriving at an accurate cost basis figure, such the company's history of stock splits, stock dividends, mergers involving company shares, and spinoffs.
Give the Shares to Charity
If the proceeds from the sale of the stock aren't needed for expenses or as part of an estate, I think that one of the simplest and most elegant solutions to the problem of an unknown cost basis is to donate the stock to a charity. In that case, the cost basis is irrelevant. All that matters is the value of the shares on the date they are donated, which is the amount that is tax deductible.
Leave the Shares to Heirs
Another option I would consider, if I didn't need the money from the shares, was optimistic they will increase in value overtime, and didn't want to worry about figuring out their original cost, is simply to hold onto them and include them in my estate. In that case, their cost-basis for my heirs will be the shares' value when I die.
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