We received $10,000 in stock from my wifes grandfather in 1998. We have reinvested dividends year over year. In 2011, the total value of the stock was ~$50,000. We sold $30,000. How do we determine how much we should be paying in gains for cashing in last year?
Went to H&R block so trying to understand how the resulting number was determined and if we are overpaying.
Since only a portion of the stock was sold then only a portion of the total cost of the stock will be used to find the gain.
Unless specified in advance of the sale the default rule is that the first stocks bought are the first stocks sold.
For gifted stock the cost basis to figure gain is the cost of the stock for the donor. That means the first part of the cost if a gift is what the grandfather paid for it.
For inherited stock the the cost basis to figure gain is the value of the stock on the date of death. That means the first part of the cost is what is was worth on the date of death (which may or may not be the same as on the date it was received).
In addition to that first part, all of the dividends that were reinvested are added costs of buying the stock. So, the total reinvested is added to that initial cost basis.
Usually the method I use is to first find what shares were sold and then add the cost of those. For example, if there were 500 shares worth 50,000 when 30,000 worth was sold then 300 shares were sold. (500 times 30000/50000).
Looking back see if more than 300 shares, adjusting for any splits, were all part of the initial batch received from grandfather. For example if 400 shares were originally inherited then 300 of the 400 or 300/400 of that original cost would be the cost of the shares. (e.g. 300/400 times 10000 = 7500 cost).
Or if the 300 shares sold is more than the original amount of shares the cost will be the entire original cost plus the cost, via reinvested dividends, of the remaining shares. (e.g. 200 shares originally selling 300 means the reinvested dividends to buy the other 100 would be added to the original cost).
That is how the amount of cost used to figure gain on the stock is computed.
Please ask if you need clarification.
Thanks for the initial details.
So we had ~345 shares gifted for 10,000 in 1998 at ~$20 per share.
The stock has split 2x since we received it (2005, 2010) both times at 2:1
We sold a total of 652 shares (333 in June 2011 @ ~$45/share, 319 in July 2011 @ ~$47/share)
Tracing back through the splits the original 345 shares equates to 1580 shares today.
If that is correct then 652/1580 = 41.25% of the original shares were sold.
Where I have questions is how to figure the original value. Is it $20/2 = $10 and then the second split is $10/2 = $5
If that is true then the original stock was worth 652 shares * $5 = 7900 and the current value is $30,000 so the taxible gain is XXXXX-XXXX or 22100 which based on long term gain = 22100*.15 or $3315 in tax?
All of the computations appear correct; but there is some difference, seemingly due to rounding.
If the original value of the shares was 20,000 and 41.25 percent was sold then the cost basis of that percent of those shares is 8250.
That method is more accurate than using the cost per share.
To avoid rounding errors in the percent use 652/1580 times 20,000 = 8253 cost.
For an even more precise answer the actual amount of shares and actual cost rather than ~20,000 and ~5.00 would be used. (Sorry, some of us accountant types are obsessive about precision)
However, it is the taxpayer that signs the return attesting that it is true, accurate and complete so the taxpayer signing determines what is accurate for this purpose.
Please ask if you need more help.
As an Enrolled Agent you can be ensured of my competence in income tax matters.