Q&A: Determining capital gains tax amounts

When I sell stocks, how do I know my basis in order to determine the capital gains tax?

A: First, let's define "basis": It refers to the price you originally paid for a stock, plus commissions and other expenses. This number is used to calculate capital gains or losses once you sell the stock. Unfortunately, it is your obligation to document basis. The IRS's position is that your basis is zero if you do not have documentation. It is common to receive additional shares as dividends, pay tax on the dividends, and then forget to add this money to your basis in the stock, resulting in a greater capital gains tax. The same circumstances arise with mutual funds, although most mutual-fund families now track basis for you. Starting in 2011, brokerage houses will be required to track basis for future stock acquisitions.