It is important to obtain and retain cost basis for sales on investments and securities. The IRS has the right to and will tax the full sales amount if a basis is not provided. Typically, the cost basis will be noted on the 1099 you receive from your brokerage firm; however, if it is not present it is the taxpayer’s responsibility to get the basis from his or her broker.
In an extreme situation, discussed on the Journal of Accountancy’s website, a taxpayer did not report over $14 million in sales of securities. It is possible the taxpayer had a cost basis to bring the realized gain down to or below zero; however, he refused to present that information to the IRS. This resulted in the taxpayer owing more than $5 million in taxes and late payment penalties to the IRS.
Overall, even if a sale has a cost basis that brings the realized gain down to zero it needs to be reported on the taxpayer’s annual tax return. In fact, if the basis is more than the sales price that will result in a realized loss which can further benefit the taxpayer.
If you have further questions regarding this topic contact our office for more information.
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