Updated: May 3, 2013 12:14PM
If you do all your stock and mutual fund investing inside your traditional Individual Retirement Account or company retirement plan, you don't have to worry about capital gains taxes. One day you'll start withdrawing, and all those contributions and gains will be taxed as ordinary income.
But if you hold shares of stock or mutual funds outside a retirement plan, tax time can be a nightmare. Whether you're a frequent trader or a long-term investor, you need to find your "cost basis" to calculate your gains or losses when you sell.
Brokerage firms and mutual fund companies will send you a 1099 form giving the amount of the sales proceeds of all your transactions. But you're in charge of matching that number with your cost basis (which is frequently different than your original cost because of dividends or splits) to determine your taxable gain or loss.
A difficult process
The process of determining taxes becomes particularly complicated if:
*You purchased the same stock or fund shares on different dates.
*You traded frequently in many stocks, or even the same stock.
*You purchased shares years ago and can't find your original purchase confirmation.
*The stock has split, or the company was merged or sold.
*A portion of your dividend is considered a "return of capital" (the case in many REITS).
*You inadvertently created a "wash sale," the sale of a stock to establish a loss, but then repurchased the same security within 30 days before or after the sale.
That's why you need to keep track of your transactions, either in a filing system or through an online portfolio tracker.
Now there's a better way to track your stock trading tax liability. Just go to www.GainsKee-per.com, an online tracking system designed specifically to provide all the information you'll need to file Schedule D, the IRS form on which your trading profits and losses are reported.
GainsKeeper not only tracks the cost basis of your stocks, but adjusts that cost to account for "corporate actions," such as stock splits, stock dividends and even changes that result from mergers and spinoffs. And it gives you tools to make smart tax decisions before you sell your securities, reminding you of the date for possible long-term capital gains treatment.
Many online brokerage firms have integrated GainsKeeper with their own systems. Firms including Ameritrade, OptionsXpress, Scottrade, E*Trade and ShareBuilder actually have GainsKeeper as a function on their Web sites, for an additional charge. (At Scottrade, Gains-Keeper is free to everyone.)
You can establish your own tracking account directly at GainsKeeper.com for $49 per year for less than 100 trades; and $149 if you are a more active trader. Then you can directly download your stock trades into GainsKeeper from almost every major brokerage firm. And you can transfer GainsKeeper data directly into TurboTax and TaxCut tax-preparation software. That's less cost and effort than an hour of your accountant's time -- or yours -- to figure out your tax situation!
There's one more helpful Web site for people who are wondering how to establish the value or cost basis of stocks they bought long ago. Www.StockSearch Intl.com is a Web site that helps people find value in old stock certificates as well as tracking historic stock prices to establish the cost basis for old investments. Just use its Historic Market Quotation service.
Hanging on to inherited stock
Of course, under current tax law, if you inherited stock, your cost basis is the price on the date of death. But many people hang on to inherited stock for years, and later need to find the price of the stock on the date of death. SSI charges $20 to research the historic stock price, and $85 to research the value of an old certificate. For an additional fee, it will even help you try to collect on the value of those shares. In the past 37 years, SSI found more than $6 million for unsuspecting investors who thought their shares were worthless.
Investing in the stock market can be a very taxing challenge. So it pays to take advantage of the latest technology to track your profits and losses -- and minimize your tax liability. That's The Savage Truth.
Terry Savage is a registered investment adviser and the author of the newly published The Savage Number: How Much Money Do You Need to Retire? (256 pages, Wiley, $24.95). Distributed by Creators Syndicate.