Publication 551: Basis of Assets

Internal Revenue Service (IRS) Publication 551, titled "Basis of Assets," is a valuable resource for taxpayers seeking to understand the concept of basis and its importance in calculating capital gains or losses. This publication explains how to determine the cost basis of various assets, which is the starting point for figuring taxes owed on their sale or other disposition.

What is Basis?

Basis refers to the initial investment you have in an asset for tax purposes. It serves as a benchmark to calculate gain or loss when you sell the asset. Simply put, it's the original purchase price you paid for the asset, but it can also include additional costs incurred.

It's used to calculate:

  • Depreciation (reduction in value over time) for certain assets like buildings.
  • Amortization (spreading the cost of intangible assets over time) for things like patents.
  • Depletion (reduction in value due to extraction) for natural resources.
  • Casualty losses (damages to property).
  • Gain or loss on the sale or other disposition of property (the difference between selling price and basis).

How do I find the basis of an asset I inherited?

Publication 551 clarifies that the basis of inherited property is generally the fair market value (FMV) on the date of death of the decedent. Exceptions may apply, so consulting the publication or a tax professional is recommended.

What happens if I don't have documentation for the original purchase price?

The publication offers guidance on reconstructing the basis using available evidence like appraisals, canceled checks, or sales records.

What if I received stock as a gift?

The basis of gifted stock is generally the donor's adjusted basis at the time of the gift. Publication 551 provides exceptions and additional details for specific situations.

What if I don't have records of the original purchase price?

If you lack documentation for the original purchase price, Publication 551 offers guidance on using fair market value at the time of acquisition or obtaining estimates from reliable sources.

What if I sell multiple shares of stock purchased at different times?

The IRS requires using the "first-in, first-out" (FIFO) method for stock sales. This means the shares you sell are considered to be the ones you purchased first, regardless of which specific shares you actually deliver. Pub 551 explains alternative methods that might be available in specific situations.