What Is the Basis?

The starting point for determining the tax basis of an investment asset you purchased is its cost, plus any commissions or other transaction fees you pay on the sale.

If you didn't purchase the asset, determining the basis can be more complicated.

If you received property from your spouse, you'll take the same basis that your spouse had before the transfer.

If you received property in a nontaxable exchange, your basis will generally be the same as that of the asset(s) you gave up, plus any cash you added into the bargain.

For years before and after 2010, if you received property as a bequest or inheritance, your basis is the fair market value of the property on the date of death, or on the alternative valuation date if the decedent's executor chooses to use that date for estate tax purposes ("stepped-up basis"). Special valuation rules may apply to a farm or a closely held business, but generally, the value shown on the estate tax return is the value that you must use. If there was no estate tax return, you may need to have the property appraised.

Special rules for decedents dying in 2010. In 2010, the "stepped-up" basis rules were replaced with carryover basis rules. This meant that, if you acquired property from a person who died in 2010, your basis in the property was the lesser of the decedent's adjusted basis or the fair market value of the property. So, if you inherit the home that your parents bought for $24,000 in 1956 with a current fair market value of $750,000, your basis would be $24,000. Fortunately, there is some relief provided: executors will be able to increase the basis of estate property by up to $1.3 million. This amount is increased by an additional $3 million (up to $4.3 million) in the case of property passing to a surviving spouse.

However, estates of decedents dying in 2010, when there was no estate tax, are given the option of (1) applying the carryover basis rules with no estate tax or (2) taking a stepped-up basis in property and paying the estate tax rates in effect for 2011 and subsequent years.

Tip For securities traded on a national exchange, you won't need an appraisal, and values are usually readily available for any date you need -- consult your attorney or accountant for information.

If you received property in exchange for services, the fair market value of the property was taxable to you at the time you received it, and that FMV is the property's basis. However, if your right to receive the property was restricted or not fully vested, your basis will generally be the FMV at the time you no longer have a substantial risk of forfeiting it, unless you elected to pay tax on the property at an earlier point in time. For more information, see IRS Publication 525, Taxable and Nontaxable Income.

If you received property as a gift, your basis will generally be the same basis that the donor had at the time the gift was made. There is an exception to this rule if the fair market value of the property was lower than the donor's basis at the time the gift was made, and if you sell the property at a loss. In that case, you must use the FMV at the time of the gift.

Example The rule described above can sometimes lead to a strange result. Let's say your uncle made you a gift of some investment property having an adjusted basis of $10,000 at the time of the gift. The FMV at the time of the gift was $9,000. You later sell the property for $9,500. Your basis for figuring gain would be the donor's basis, or $10,000, but considering your sales price of $9,500, you would not have a gain. However, your basis for figuring loss would be the FMV or $9,000, but considering your sales price of $9,500 you would not have a loss. In this case, you don't have a taxable gain or a loss. When reporting the sale on Schedule D, list the item's basis as being the same amount as the sales proceeds.