I found out a terrible and time consuming problem when I was forced to switch from TradeKing to Fidelity my cost basis does not always transfer!  Imagine my surprise when I signed into my fidelity account and found all my stocks moved over from my mostly dormant TradeKing account, but no Cost Basis Information!

Positions Fidelity Investments

Why is Cost Basis Information Important?

To understand why cost basis is so important one first has to understand what it is.  Investopedia defines Cost Basis as,

The original value of an asset for tax purposes (usually the purchase price), adjusted for stock splits, dividends and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset’s cost basis and the current market value. Also known as “tax basis”.

In other words, for all intents and purposes, when dealing with a non-qualified investment account one’s cost basis is usually their  purchase price.  But why would you need to know your cost basis on an investment asset?

Cost Basis and Capital Gains Taxes

Anyone that has ever done their own taxes knows that there are two types of Capital Gains Taxes; Long Term Capital Gains and Short Term Capital Gains.  The two types are differentiated as to how long the asset is owned by the individual; long term capital gains is taxed at a lower rate (5%/15% Depending on your marginal rate vs. ordinary income tax brackets which can be as high as 35%).

Capital gains tax is owned on the difference between the amount the asset is sold and your cost basis.  Like most things in life I think the best way to understand the topic is with an example:

Example: You buy 100 shares of XYZ at $35, paying $3,500 plus a brokerage commission of $20. Your basis is $3,520. Later, you sell when the stock is at $39. You receive $3,900 minus a brokerage commission of $20, so your amount realized is $3,880. Your capital gain is $3,880 minus $3,520, or $360.

However, when you can’t document your basis, it is assumed to be zero.  So there could be a situation where I owe a healthy tax bill when it is not justified.

Has anyone had a similar problem? How did you resolve not having your cost basis transfer?

I have an out of the box idea that I haven’t verified that I am allowed to do.  I will update the post when I find out.

Update: Called Fidelity and proposed my amazing idea – transfer the shares into an IRA.  This way Cost Basis doesn’t matter since there is no capital gains in an IRA.  Denied, against the regulations.

I am still waiting on my perpetual income machine to transfer so we’ll see if I have a similar problem.