Disclaimer: I’m not an tax professional/accountant/CPA. This is just a description of how I, as a financial advisor, understand these tax rules to work. It is not tax advice. Consult your own accountant or do your own research before acting!
Figuring out your cost basis on sold investments
Generally, cost basis is the price you paid for something. If you buy shares of Apple for $100/share and then sell them for $300/share, your cost basis is the $100/share, netting you a $200/share capital gain. If you buy gold at $3,000/troy ounce (toz) and sell it for $4,000 per toz, you have a capital gain– taxed at higher collectibles rates!– of $1,000/toz.
Since roughly 2010, brokerages have been required to track your cost basis for you electronically, making it easy for them to send you 1099-B statements listing your cost basis.
If you can identify the shares themselves by when you purchased them, you can choose to sell specific lots with specific cost bases. If you can NOT identify the shares you’re selling, the basis will be the shares you acquired first. For mutual funds, you can choose to use the average cost method instead of FIFO (first in first out.)
Always keep transaction records for the dates, prices, and any fees you’ve paid for any assets you buy!
“https://www.irs.gov/pub/irs-pdf/p551.pdf
Identifying stock or bonds sold. If you can adequately
identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of
stock or bonds. If you buy and sell securities at various
times in varying quantities and you can’t adequately identify the shares you sell, the basis of the securities you sell
is the basis of the securities you acquired first. For more
information about identifying securities you sell, see
Stocks and Bonds under Basis of Investment Property in
chapter 4 of Pub. 550.
Mutual fund shares. If you sell mutual fund shares acquired at different times and prices, you can choose to use
an average basis. For more information, see Pub. 550.
When you inherit assets
Inherited assets generally receive ‘stepped up’ cost basis at the death of the person who left you the assets. This means your own cost basis is ‘stepped up’ to the fair market value on the date that person died.
TL;DR – Inherited assets basis is usually the fair market value upon the benefactor’s death.
Ex: Your Dad purchased a house for $100,000 in 2000. He dies in January 2025, leaving the home to you. You figure the home was worth $400,000 on that date, so that’s your new cost basis. Later you sell the home for $600,000. You have a $200,000 capital gain above your cost basis.
When you are gifted assets
Cost basis for gains
When someone who is still living gifts you the assets, your basis is generally their original cost basis (+ gift taxes, if they paid any, which is rare.) Therefore, it’s important to get documentation when receiving any gifts of salable material (stocks, bonds, gold, real estate) on what the person gifting it to you originally paid for it, plus any other costs them put into it (i.e.: capitalized home improvement costs, or brokerage fees for stock purchases.)
Use FMV on the gift date when calculating losses
If you sell at a loss, the basis is the lower of the donor’s original cost or the fair market value (FMV) at the time of the gift. Ex: Your ex-girlfriend gifts you 10 shares of Fly-By-Night Enterprises valued at $0.10/share when you receive them on Valentine’s day 2026. She bought them for $0.15/share. If you go to sell them at $0.05/share later, you have a loss of 0.05/share, NOT the 0.10/share loss if you’d been able to use her basis. (If you sell at 0.12/share, I have no clue what you have: gains of 2 cents per share? No gains or losses…?)
When you don’t know your cost basis
If you don’t have the dates something was purchased, but you do have the total cost, you could figure the average cost paid per unit of the thing. I.e.: if your crazy Uncle gifts you 10 oz of gold that he paid $10,000 for– get the receipts in case the IRS comes calling!– you could use a cost basis figure of $1,000/oz that you sell in the future.
If you can figure the date(s) that something was purchased, you can often look up historical prices for the asset on those dates. If you have a date range of when it was purchased (say, a year), you might be able to average the high and low prices from that year, or the beginning and ending year prices, or be conservative (i.e.: pay more in taxes!) and take the lowest price in that year.
If you have no clue when the assets were purchased or for how much, the IRS might compel you to assume ZERO cost basis (i.e.: assume the whole thing was a taxable gain!)
The IRS generally accepts a well-documented, reasonable estimate if original records are lost.
The below is a Google AI summary from Jan 2026 of how to make a good faith estimate of cost basis:
“Key Strategies for a Defensible Estimate:
- Utilize Historical Data: For stocks, use historical stock price databases to find the high/low or closing price on the assumed date of purchase, or calculate the average price for that year.
- Factor in Corporate Actions: Account for stock splits, mergers, and spin-offs that occurred between the purchase date and the sale date, as these alter the cost basis per share.
- Include Reinvested Dividends: If the asset was a mutual fund or stock with dividend reinvestment plans (DRIP), the original purchase price must be increased by the amount of reinvested dividends.
- “Average Cost” Method (Mutual Funds): For mutual funds, you can calculate an average cost basis by taking the total amount invested over the years and dividing it by the total shares owned.
- Reconstruct Records: Contact the broker or transfer agent to request historical records. If they cannot provide them, document your attempts to get them.
- Use Third-Party Evidence: Use bank statements, old tax returns, or correspondence with the broker to prove the cash outflow at the time of purchase.
- Inherited Assets (Step-Up Basis): For inherited assets, the cost basis is generally the Fair Market Value (FMV) on the date of the previous owner’s death. Use probate documents or estate tax records to establish this value.
Documenting for Audit Defense
To pass IRS scrutiny, maintain a detailed file explaining how you arrived at your estimate:
- Written Statement: Create a document explaining that records were lost, and describe the steps taken to reconstruct them.
- Evidence Folder: Include screenshots of historical price charts, documentation of corporate splits, and notes from phone calls with brokers.
- Methodology Note: Note that the estimate is based on the highest-probability, lowest-gain method (e.g., assuming a higher purchase price if the date is uncertain) to show good faith in not trying to evade taxes.
Important Considerations
- Don’t Use Zero: While a zero-basis reporting is “safe” from audit, it causes you to overpay taxes on the full sales price.
- Avoid “Convenience” Estimates: Simply guessing a number will not stand up to an audit. The estimate must be anchored in reasonable, verifiable, or logical data.
- Consider Professional Help: If the amount is large, engage a CPA or tax attorney to reconstruct the basis and provide a “reasonable cause” argument for any potential inaccuracies.
If you cannot find any information, the IRS may require you to treat the cost basis as zero, but a documented “good-faith estimate” is always preferable. “
