Stock Basis

[Christian]

A client upon retirement took his company stock held in his 401k plan and transferred it to his brokerage account as a distribution. He paid income tax on the costs (basis) of his stock withdrawn. Last year after several years he sold 100 shares of his holdings. My reading on this is that he must divide his total stock holdings from the distribution into his basis to arrive at the cost per share. He then can multiply by 100 and subtract this from his sales price to arrive at the tax on what is a sizable capital gain. Is this correct?

[kcjenkins]

Yes, as I understand the situation, unless he has records of the actual cost basis of the original purchases, and can identify which specific shares he sold, using average cost per share is the best way to do it.

[SaraEA]

You can only use average cost for mutual funds. Stocks are FIFO unless specific lots are identified at the time of sale.

[jainen]

>>He paid income tax on the costs (basis) of his stock withdrawn<<

Presumably tax would be due on the FMV, since a 401(K) doesn't usually have basis. In that case, the new basis would be the taxable FMV, prorated equally for all shares withdrawn at the same time.

[Christian]

The shares were acquired over many years for which he evidently has no record. His cost of all his shares were reported on his 1099-R provided by his plan administrator. The portion shown as taxable was what he paid for all shares. I'm going with the average costs argument since there evidently are no extant records on individual lot purchases over many years. Thanks for your input. If checked I feel the Service would likely agree.

[Gail in Virginia]

I think that you are correct, Christian. Even though this is not a mutual fund, a distribution from a qualified plan has the option when they take the distribution in kind to pay tax on the stock distribution and continue to hold the stock. That establishes their basis, and therefore I would consider that to be one lot. Unless he has received other shares since his distribution as taxable dividends, he only has the single lot. Therefore, your method is FIFO for this lot, IMO.

[kcjenkins]

Yes, sometimes we have to go with the best info we have, and the good part is that so does the IRS. If you have tried to get the info from the employer, and it's no longer available, that's the best option I can see.