Originally Posted by state123
Over the years, interest, principal payment, etc. for a GNMA security has been reported on the individual year tax return.
In 2013 the entire security was sold (same shares as purchased). In determining the cost basis is it simply the amount the security was originally purchased for?
as you can see, when you sell a security, you will need to know your cost basis to determine whether you have to pay a capital gains tax or can take a capital loss. The cost basis is typically the original purchase price of a security. Depending on how you acquire a security, there may be different ways to determine the cost basis. For example, if you inherit a security, your cost basis is the FMV of the security at the time of the donor's death. So using the correct tax basis is important especially if you reinvested dividends and capital gains distributions instead of taking the earnings in cash. Reinvesting distributions increases the tax basis of your investment, which you must account for in order to report a lower capital gain and therefore pay less tax. If you don't use the higher tax basis, you could end up paying taxes twice on the reinvested distributions.For example, say you bought 1000 shares of a stock for $10k last year and you reinvested the $1k of dividends distributed from the company. The next year, you received $2k in dividends and capital-gains distributions, which you again reinvested. Since tax law considers these reinvested earnings as paid to you even though you didn't actually have the cash in hand, your adjusted cost basis when the stock is sold should be recorded at $13k instead of the original purchase price of $10k. Thus, if the sale price is $15k, the taxable gain would only be $2k ($15k - $13k) instead of $5k ($15k- $10k). If you record the cost basis as $10k you'll end up paying more taxes than you have