Here's part 3 of a piece from Money Central that details the top taxpayer mistakes:
Not properly tracking investment 'basis'
A basis is the original value of your investments. If you have mutual funds, for example, each year those funds will report to you the dividends and capital gains you earned. These dividends and gains will be taxable to you in the year reported.
When you sell these funds, your gain will be the difference between what you receive on the sale and your "basis" (technically your amount realized less your adjusted initial investment basis). The basis actually increases once any financial gains you reinvested are taxed. If you reinvested taxable gains from these funds, those gains (all of the dividends and capital gains reported) are added to your basis to reduce your gain (or increase your loss). For example, if I bought a fund for $1,000 and reinvested $200 in dividends and $50 in capital gains, my basis is now $1,250. If I sell the fund for $1,500, I only have to recognize $250 in gain on that sale. That’s much better than reporting a $500 profit for tax purposes. To make sure you have the right basis, check with your fund company or broker. If you can’t get the data by the April 15 filing deadline, you can either file for an extension or file an amended return later.
This is a hard one. I use Quicken (though I'm thinking of changing to You Need a Budget), so it calculates the cost basis for me. But if you do it by hand, it can get messy.
Click here to read part 4 of this series.
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