Don't underestimate your cost basis in stocks and bonds

To minimize your taxable gain or maximize your tax loss when you sell investments, you want your cost basis to be as high as possible.  Unfortunately, it's easy to overlook several items that add to your basis.

• Start with the basics.  When you sell shares of a stock or mutual fund, your gain or loss is the difference between the sales price and your cost basis.  Generally, your cost basis starts out as the price you pay for your shares, including any broker fees and commissions.  You can then increase this initial basis for taxable events such as dividend reinvestments and capital gain distributions.

• Pay attention to dividends.  In a dividend reinvestment program, the company automatically reinvests your dividends in more shares of stock.  Since you must include these dividends in your taxable income, you can add them to your cost basis in the shares.  Think of it as if the company sent you a dividend check and you then used that money to buy new shares.  Keep good records of each dividend reinvestment so you can calculate an accurate basis when you eventually sell.

• Add in capital gains.  Mutual funds generate capital gains from selling investments.  Shareholders must pay taxes on their share of annual capital gains, even though they receive no actual cash.  Add the amount of any taxable capital gain distribution to your cost basis in the fund's shares.  Here again, you should keep good records to support your basis calculation.

By paying attention to these basis adjustments, you'll help minimize your taxes.