A Great Reason to Keep Good Records
I’ve written before about financial records and what to keep and what to toss. Squarely in the ‘keep’ category is documentation on the purchase of stocks and mutual funds.
Why it’s critical to keep buy order documentation
Keeping buy order documentation is critical because it provides two key pieces of information - date of purchase and purchase price. When you eventually sell the fund or stock, you must know these two things.
Date of purchase is used to determine whether gains are long- or short-term. There are different tax consequences for each. Purchase price, or cost basis, is also necessary to calculate the actual gain (or loss).
What if I don’t have it?
If you don’t have your cost basis, the IRS assumes it to be zero. That’s right. If you can’t provide documentation, the tax man will assume you got the security for nothing. As a result, you tax bill on sale could be much, much bigger than it needs to be.
But there’s a but. If you know the date of the purchase, you can look up the closing price on that day and the IRS will allow it. And if you don’t know the exact date, from what I can tell by reading their site, the IRS will likely allow you to make an ‘estimate.’
This actually happened to me. I lost/threw away/ate a buy order for a stock I owned. I knew from bank records the day I bought it, though. I went back and did some research on pricing and used the closing price that day as my basis. So far no audit.
taxes
