Q. I have some shares of Duke Energy Corp. (DUK) which are held in a DRIP plan. The dividends are automatically reinvested to purchase more shares. This stock was purchased for me in the 90s by my grandfather, who has since passed away. Originally the stock was for Progress Energy Corp. (PGN). I have no idea when exactly they were purchased or for how much. If I liquidate my entire position, how can I figure the cost basis?
A. Determining the cost basis of stock that’s been held for a long time can be complicated.
The first question is how did you actually got the PGN shares from your grandfather? Did you inherit them when he died or was he giving them to you as he purchased them?
If it was an inheritance, the initial cost basis of the PGN shares would have been the fair market value on the date of his death, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.
If he instead gave you the PGN shares over time, you generally step into his shoes for both cost basis and holding period for calculating capital gains, Maye said.
“A recipient of a stock gift may have a lower cost basis than the donor if they are gifted stock with a fair market value below the donor’s cost basis and when they sell it, the fair market value remains below the donor’s cost basis,” Maye said. “In effect, the recipient’s cost basis is the fair market value of the stock on the day they received it as a gift.”
The first step in figuring out your cost basis is trying to determine the number of shares and cost basis on the original Progress Energy Corp (PGN) shares, Maye said. Ideally, you would have the original records, including the date of purchase and number of shares and cost for those shares.
Maye said if you at least know the number of shares acquired by date, you can use bigcharts.com to find out the historical price on those dates to calculate the cost basis by purchase.
After you have gotten the cost basis on the original PGN, you will then need to figure out the adjusted cost basis when it was acquired by Duke Energy.
Typically that information can be found on the website of the acquiring company – in this case Duke – in the investor relations section of its website, Maye said.
“Post-acquisition, I would suggest contacting Duke as they hopefully have the detail for all shares acquired via dividend reinvestment post-merger,” he said.
The other item that may impact the cost basis would be corporate actions such as stock splits, which can also be found in the investor relations section of most company websites.
Another option, Maye said, if the value of the position is not so large is to put zero cost basis down and pay the long-term capital gains rate.
“For example, if the current value of the reader’s Duke position is $1,000 and they qualify for the 15 percent long-term capital gains rate, the federal tax hit would be $150 plus any state income taxes,” Maye said. “If the reader does decide to not bother with calculating the cost basis, they could review other investment positions to see if they had any losses that can offset the gain from the sale of the Duke position.”
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