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Tax Guide for Investors

Stock Basis and Holding Period

Your starting point for learning about the basis and holding period of any shares of stock you own.

Basis is important because it's used to determine how much gain or loss you report when you sell your stock, and may be used for other purposes as well. Your holding period is essential in determining what category of gain or loss you have when you sell.

Overview

In the easiest case your basis is simply the amount you paid for the stock plus the brokerage commission. But there are different rules for finding the basis and holding period of stock acquired in different ways. Also, various events that occur after you own the stock may cause your basis to change. For example, a stock split doesn't change the total basis of your stock, but it changes the basis per share.

So your basis for your stock at any point in time is equal to:

  • Your initial basis (the basis immediately after you acquired the stock),
  • Plus or minus any adjustments in your basis.

The tax law refers to this number as your adjusted basis. If there have not been any adjustments, then your adjusted basis is the same as your initial basis.

Your holding period normally begins on the day after you acquire stock. But there are special rules here, too. For example, if you receive stock in a stock split, the new shares you receive will have the same holding period as the shares you previously owned.

Example: You bought 40 shares of XYZ in 1995. In 1998 the stock splits and you receive 40 new shares giving you a total of 80. A sale of the new shares will produce long-term capital gain or loss even if you actually hold them only one day.

Determining Basis and Holding Period

Headings in the paragraphs below are links to pages explaining how different kinds of transactions affect your basis and holding period.

Stock You Purchased
This page provides the rule for determining your initial basis and holding period for normal stock purchases.

Stock Acquired Through a
Dividend Reinvestment Plan

Your initial basis for stock you purchase through a dividend reinvestment plan may be different than if you bought the stock directly through a broker.

Stock Received as a Gift
If you receive stock as a gift, you need to get basis and holding period information from the person who gave it to you.

Stock Received from Your Spouse
There's a special rule for any stock you receive from your spouse, whether it's a gift, a sale, or part of a divorce.

Stock Received from a Decedent
There's a unique rule that "steps up" the basis of stock when you inherit it.

Stock from Options
You can acquire stock by exercising options (or warrants or stock rights), or when someone else exercises a put you sold. Choose this link to learn about basis in these situations.

Stock Dividends and Splits
You may receive stock when a company declares a stock dividend or split. This page explains the effect on your basis and holding period.

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