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How to find the bottom line for capital gains and losses

Radio Transcript, 2 minutes 55 seconds, for use during week of Jan. 21.

Description:  Penny and Susan talk selling stocks, what basis means, and how it’s determined

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the investor Protection trust, providing investor education on the web at: investorprotection.org.

Susan:  Penny, we talked earlier about how important it is to keep good records.  And I know that one of the reasons it’s important is so that I can figure the tax I owe on capital gains income correctly.

Penny: That’s right.   The tricky part is determining what is called “the basis” of any stocks you’ve sold in the past year.

Susan: Uh, would you mind reviewing exactly what basis is ?  I did sell some stock recently and I want to be sure I understand exactly what I need to know.

Penny: Sure.  Your cost basis is typically what you paid for the shares originally, including the brokerage commission.  When you sell a stock, you use your cost basis and the sale price of the stock to determine your capital gain or loss.

Susan: Ok.  So, if I bought a hundred shares of stock at ten dollars a share and the brokerage commission to buy and sell the stock was forty dollars...?

Penny: Then you would figure one hundred shares at ten dollars per share, or one thousand dollars, plus the forty dollar commission, which would make your cost basis 1,040 dollars.  Let’s say you sold the shares for $20 each.  Your gain – the amount you pay tax on – would be $960 minus any commission you paid to sell the stock.

Susan: Thank you.  It’s starting to make sense to me now.  What if I didn’t buy the stock, but received it as a gift instead?

Penny: If you receive stock as a gift, the gift-giver’s basis becomes your basis.  For example, if your Great-Aunt Sophie gives you fifty shares of stock that she purchased for five hundred dollars, then your basis would be five hundred dollars, not the current market value of that stock.

Susan: What if I inherited the stock?  For example, my father left me some stock when he died last year.  What would be the basis for that stock?

Penny: In that case, your basis would be the market value of the stock on the day your father died.

Susan: Thank you, Penny.  This has been really helpful.

Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

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Updated January 22, 2008