Calculate the Investment Basis Correctly Or End Up Paying Double The Tax!
If you buy a stock, the broker gives you an opinion, in which the costs. Then it is a straight transaction and there is no problem in calculating the basis, if you are selling. Take the purchase price as the basis and calculation of capital gain or capital loss.
But things are difficult, when you invest in stocks. In this case, the calculation of gains or losses from the sale of shares is invested is a little complicated.
Suppose you bought 500 shares from the stock for $ 2,500 in 2006. You will receive a dividend of $ 200 in the same year and the dividends were reinvested. They have a different dividend of $ 300 in 2007 and that was reinvested. In 2008 you sold all your shares for $ 3,300. Here is the real cost of investment $ 3,000 (and is NOT $ 2,500), and you should pay the taxes on the capital gain of $ 300. You have already paid taxes on dividends received in 2006 and 2007 and these amounts should be added to the basis in calculating your capital gain.
IRS considers you to be reinvested earnings as paid, although it was never the money in hand. These gains will be “constructively received” means that you that you could have taken the money, if you think it is better. These gains have already been reported on the Form 1099 DIV and you must pay taxes on it in the year after it is received.
If you are not careful, you can not explain the reinvestment of dividends and end up Uncle Sam as a tax donation for the second time on the same money!
The same principle applies to the calculation of the losses. If you made a loss, it can be used to reduce other gains. However, an incorrect calculation of the base would prevent you from making full benefit.
To stay with the same example, if you sold the stock for $ 2000, you make a loss of $ 1000 ($ 500, which is not obvious) from the normal calculations. This additional loss can make a significant difference in the final tax payment.
You do not need much to pay IRS on investment gains or losses. You have to get all your statements to make a correct calculation. The testimony also shows you to acquire the payment of fees or charges or to sell. These amounts are not deductible from your income, but they are useful for the basis to calculate.
To maintain these documents, you need a little extra effort. But it certainly can make extra money in their pockets.
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