Stock You Purchased

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This page explains how to determine your initial basis and your holding period for stock you bought in a normal purchase. The general rules here don't apply in the following special situations:

• Stock you bought from your spouse.
• Stock you bought through a dividend reinvestment plan.
• Stock you bought when you exercised an option.
• Stock you bought in a wash sale. (A wash sale occurs when you sell stock at a loss but purchase identical stock within 30 days before or after the sale.)

Cost basis

If none of the special situations mentioned above apply, your initial basis for stock you buy is your cost basis. In other words, it is the amount you paid to buy the stock. Cost basis includes two items:

1. The amount paid for the stock, and
2. The commission paid on the purchase.

Example: You buy 40 shares of XYZ at $38.50 (total purchase price $1,540) and pay a $20 commission on the purchase. Your initial basis for this stock is $1,560, or $39.00 per share.

If you paid a stamp tax or similar transfer tax when you bought the stock, your initial basis includes this item as well. Fortunately, stamp taxes on ordinary stock purchases are largely extinct.

Holding period

When you buy stock on a stock exchange or in the over-the-counter market, your broker will report the trade date and the settlement date. The trade date is the date the trade is executed on the exchange. The settlement date is the date (usually three business days later) when cash settlement is made according to the rules of the exchange. For tax purposes, your holding period begins on the day after the trade date. The settlement date is ignored.

In practice, this means you must sell at least a year and a day after the trade date to get long-term capital gain.

Example: The trade date of your purchase is December 15, 2003. If the trade date of your sale is December 15, 2004, you will have short-term gain or loss. If the trade date for your sale is December 16, 2004 or later, your gain or loss is long-term.