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  • Valerie Gospodarek, CFA

5 Ways to Handle Investments with Missing Cost Bases

In last month’s article, Get to Know Your Cost Basis Now and Save at Tax Time, I defined cost basis and provided an example of why knowing your cost basis is so important for tax purposes. This month, I’d like to provide you with 5 ways to address not knowing your cost basis (4 of them being tax-efficient).

Ideally, everyone has kept stellar records and if they haven’t been keeping a detailed spreadsheet with all of their cost bases, they have all the necessary investment statements to gather that information. But in reality, who actually does this (other than me!)?! So, what are your options when you just aren’t able to come up with that information?

Fear not – all is not lost. You still have some options:

First, if you don’t need the funds and are charitably inclined, consider donating those investments to your favorite charity. By donating investments with $0 cost basis instead of writing a check to the charity, you keep your cash and help your charity, all while neatly handling that no cost basis investment. Want to donate to multiple charities without the hassle of transferring small amounts of the investment to each one? Consider opening a donor advised fund and transferring your no cost basis investments to it, and then making your donations from that fund. Most large investment firms offer donor-advised funds and can be found easily by just Googling “donor-advised funds.”

Second, if you are charitably inclined but need the money from your $0 cost basis investment, consider creating a charitable remainder trust and funding it with that investment. A charitable remainder trust will provide you with a partial tax deduction, generate income payable to you on a periodic basis, and then distribute any remaining balance to the charity at the time of your death. For more information on charitable remainder trusts, contact your favorite charity or charities to see if they offer this service.

Third, if you are planning to help out a family member (perhaps a child’s or grandchild’s tuition payments?) or friend financially, consider transferring your $0 cost basis investment to them. As of the 2017 tax year, you can gift up to $14,000 to another individual without having to file a gift tax return. This not only allows you to keep cash on hand for other purposes while finding a useful home for that no cost basis investment, but if the recipient is in a lower tax bracket than you, they will pay less capital gains tax on its sale than you would have.

Fourth, if you don’t need the proceeds from selling your $0 cost basis investment at this time, but you’d like to hold onto it on the chance that you may need it in the future, you can always keep it and let the investment receive a “step-up” in cost basis when you pass away. What does this mean? It means that when you pass away, the investment’s cost basis will get reset to its fair market value as of the date of your death and will pass on to your heirs (as designated in your will or trust) at that new higher cost. At that time, your heirs can sell it for $0 capital gains.

Fifth, if all else fails and you need the proceeds from selling your $0 cost basis investment, you can always just sell it and pay the capital gains tax on its full market value. Although not tax efficient, it is not a bad decision if you really need the funds, and it may be more cost-effective than having to take out a loan for your cash needs.

If you need help deciding on the best option(s) for your low or no cost basis investments, contact me at (925) 954-4966.

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