If you do all your stock and mutual fund investing inside your traditional IRA or company retirement plan, you don't have to worry about taxes. One day you'll start withdrawing, and your contributions and gains will be taxed as ordinary income. But since you're reading TheStreet.com, it's likely that you hold stocks or mutual funds outside a retirement plan. If that's the case, tax time can be a nightmare. Whether you're a frequent trader or a long-term investor, you need to find your "cost basis" to calculate your gains -- or losses -- when you sell. Brokerage firms and mutual fund companies will send you a 1099 form giving the amount of the sales proceeds of all your transactions. But you're in charge of matching that number with your cost basis (which is frequently different than your original cost because of dividends or splits) to determine your taxable gain or loss. The process of determining taxes becomes particularly complicated if:
You purchased the same stock or fund shares on different dates You traded frequently in many stocks, or even the same stock You purchased shares years ago and can't find your original purchase confirmation The stock has split, or the company was merged or sold A portion of your dividend is considered a "return of capital" (the case in many REITS) You inadvertently created a "wash sale" -- the sale of a stock to establish a loss, but the repurchase of the same security within 30 days of the sale. Now there's a simplified way to track your stock-trading tax liability. GainsKeeper.com provides an online tracking system designed specifically to provide all the information you'll need for reporting your profits and losses. GainsKeeper not only tracks the cost basis of your stocks, but adjusts that cost to account for corporate actions such as stock splits and dividends. It even monitors securities changes that result from mergers and spinoffs, which can be incredibly complicated. For example, in Verizon's ( VZ) purchase of MCI, holders of every MCI share received 0.5743 shares of Verizon and $2.74 in cash. Or consider Ashland 's ( ASH) sale of its stake in Marathon Ashland Petrolelum to Marathon Oil ( MRO) last year. Every share of Ashland became one share of new Ashland and 0.2364 shares of Marathon! Figuring your cost basis would be a nightmare without help from GainsKeeper.
GainsKeeper also gives you tools to make smart tax decisions before you sell your securities. For instance, you might be inclined to sell a stock at a certain time, but the program will remind you that your tax liability could drop substantially if you're willing to hold on a bit longer and qualify for long-term capital gains treatment. GainsKeeper even helps you designate which shares should be sold if you purchased the same stock at different times. The standard procedure is for purchases and sales to be offset on a "first in-first out" basis. That is, the shares purchased earliest are used to determine the amount of gain if less than the entire position is sold. With mutual funds, the gains on sale are typically based on an "average cost" basis. But most brokerage firms will let you designate -- at the time of sale -- which lot of stock you want to sell, so you can strategically plan your tax liability. Many of the major online brokerage firms have integrated GainsKeeper with their own systems. Firms including Ameritrade, OptionsXpress, Scottrade, E*Trade, and ShareBuilder have GainsKeeper as a function on their Web sites, for an additional charge. (At Scottrade, GainsKeeper is free.) But you can establish your own tracking account directly at GainsKeeper.com for $49 per year for fewer than 100 trades, or $149 if you are a more active trader. Then you can directly download your stock trades into GainsKeeper from almost every major brokerage firm. There's another helpful Web site for people who are wondering how to establish the value or cost basis of stocks they bought long ago.
Stock Search International is a Web site that helps people find value in old stock certificates, as well as track historic stock prices, to establish the cost basis for old investments.
Of course, under current tax law, if you inherited stock, your cost basis is the price on the date of death. But many people hang on to inherited stock for years, and later need to find the price of the stock on the date of death. If you received stock as a gift, your cost basis is almost always the same as the giver's cost basis. Again, you might need help if records are not available. Stock Search International charges $20 to research the historic stock price and $85 to research the value of an old certificate. For an additional fee, they'll even help you try to collect on the value of those shares. In the past 37 years, they've found more than $6 million for investors who thought their shares were worthless. For example: Suppose an investor purchased 20 shares of RCA (originally Radio Corp. of America) on Dec. 31, 1963. SSI established the cost basis at $79.375 a share, a total of $1,587.50. But in 1964 RCA had a 3-for-1 stock split. Then, in June 1986, RCA was acquired by General Electric ( GE), and each old share of common was redeemed for $66.50 cash. Based on that price, that old stock certificate has a current value of $3,900. Of course, SSI also reminds you that you have a long-term -- very long-term! -- capital gain of $2,402.50. Investing in the stock market can be a very taxing challenge. So it pays to take advantage of the latest technology to track your profits and losses -- and minimize your tax liability. That's The Savage Truth.