Explaining cost basis

Cost basis determines the capital gains or losses reported on your tax documents following the sale of a security, so it’s important to know how to track it and how actions within your account can impact it.

 

Cost basis reporting

Cost basis is the total price that was paid for a security, including any fees at the time of purchase. Maintaining an accurate record of your cost basis is important and can help ensure you’re not overpaying on capital gains or losses on the sale of your securities.

Capital gains and losses

A capital gain or loss results when a security is sold. The sale price will determine if the trade resulted in a gain or a loss, and the sale date will determine if you’ve held the security for the short term or the long term.

  • Short term capital gain: A security that is sold for more than its purchase price and was held for one year or less
  • Long term capital gain: A security that is sold for more than its purchase price and was held for longer than one year
  • Short term capital loss: A security that was sold for less than its purchase price and was held for one year or less
  • Long term capital loss: A security that was sold for less than its purchase price and was held for longer than one year 

Long term capital gains are generally taxed at a lower rate than short term capital gains, which are typically taxed at your top marginal tax rate.

Wash sale impact

A wash sale occurs when a security is sold for a loss and the same,(or substantially similar), security is repurchased within 30 days. The loss that was incurred following the sale of the security is disallowed and you are unable to claim the loss when filing your tax return. You may also see the disallowed loss added onto the cost basis of the repurchased security.

Corporate action impact

While a corporate action will rarely cause your total cost basis to change, it’s possible you will see a change in the security’s cost per share. Common types of corporate actions and their expected cost per share impact are listed below:

  • Forward stock split: A forward stock split will reduce your price per share since your share quantity will increase
  • Reverse stock split: A reverse stock split will increase your price per share since your share quantity be decrease
  • Symbol or name change: Price per share does not typically change following a name or symbol change – however, a change accompanied by a merger or acquisition may result in changes
  • Mergers and acquisitions: Terms of every merger are unique and can impact your cost basis differently, since some are taxable and others are not– we recommend contacting us if you have questions about cost basis changes following a merger

Updating cost basis

If you notice that cost basis is not displaying within your account, it may be due to one of the following:

  • Immediately following a brokerage account transfer: Cost basis can take up to 30 days to be swept from your previous brokerage following an account transfer. Most brokerages send cost basis electronically to the new brokerage, which often occurs automatically.
  • 30 days after a brokerage transfer: If it has been more than 30 days since your funds were transferred to M1, it is likely that your previous brokerage did not send your cost basis automatically to M1 or respond to M1’s attempts to retrieve this information.  If you would like your cost basis to be sent to you or to M1, please contact your previous brokerage.
  • Your securities are uncovered: Brokerages were not required to keep cost basis records for stock purchases that occurred prior to 2011 and certain ETF purchases that occurred prior to 2012. If your securities were purchased prior to 2011, it is possible that your previous brokerage will not be able to provide M1 with cost basis information.

If you have cost basis information from your previous brokerage, you can upload it here and we will send it to our clearing firm, Apex Clearing, for processing. The process typically takes between 1-2 weeks, but can take longer during times of increased volume like year-end and during tax season. Once your cost basis is updated by Apex Clearing, you can expect to see changes in your M1 account within two to three business days.

If you have further questions, please contact us.

 

M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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