eCFR — Code of Federal Regulations
The adjusted basis for determining the gain or loss from the sale or other disposition of property is the cost or other basis prescribed in section or other applicable provisions of subtitle A of the code, adjusted to the extent provided in sections , , and or as otherwise specifically provided for under applicable provisions of internal revenue laws. If after applying the provisions of section for the taxable year, including the percentage limitations of section b , no deduction is allowable under that section by reason of the sale or exchange of the property, section b does not apply and the adjusted basis of the property is not required to be apportioned pursuant to paragraph b of this section.
In ascertaining whether or not a charitable contributions deduction is allowable under section for the taxable year for such purposes, that section is to be applied without regard to this section and the amount by which the contributed portion of the property must be reduced under section e 1 is the amount determined by taking into account the amount of gain which would have been ordinary income or long-term capital gain if the contributed portion of the property had been sold by the donor at its fair market value at the time of the sale or exchange.
In determining the period over which gain may be reported as provided in such example, the life expectancy of the survivor annuitant may not be taken into account. The fact that the transferor may retain the right to revoke the survivor's annuity or relinquish his own right to the annuity will not be considered, for purposes of this subdivision, to make the annuity assignable to someone other than the charitable organization. Gain on an exchange of the type described in this subdivision pursuant to an agreement which is entered into after December 19, , and before May 3, , may be reported as provided in example 8 in paragraph c of this section, even though the annuity is assignable.
For purposes of determining gain on a sale or exchange to which this paragraph applies, the adjusted basis of the property which is sold or exchanged shall be that portion of the adjusted basis of the entire property which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the entire property. The amount of such gain which shall be treated as ordinary income or long-term capital gain shall be that amount which bears the same ratio to the ordinary income or long-term capital gain which would have been recognized if the entire property had been sold by the donor at its fair market value at the time of the sale or exchange as the amount realized on the sale or exchange bears to the fair market value of the entire property at such time.
For determining the holding period of such contributed portion, see section 2 and the regulations thereunder. See Rev. Such gain is to be reported by A ratably over the period of years measured by the expected return multiple under the contract, but only from that portion of the annual payments which is a return of his investment in the contract under section 72 of the Code.
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This section applies only to sales and exchanges made after December 19, In general, the basis of property is the cost thereof. The cost is the amount paid for such property in cash or other property.
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This general rule is subject to exceptions stated in subchapter O relating to gain or loss on the disposition of property , subchapter C relating to corporate distributions and adjustments , subchapter K relating to partners and partnerships , and subchapter P relating to capital gains and losses , chapter 1 of the code. In computing the cost of real property, the purchaser shall not take into account any amount paid to the seller as reimbursement for real property taxes which are treated under section d as imposed upon the purchaser.
This rule applies whether or not the contract of sale calls for the purchaser to reimburse the seller for such real estate taxes paid or to be paid by the seller. On the other hand, where the purchaser pays or assumes liability for real estate taxes which are treated under section d as imposed upon the seller, such taxes shall be considered part of the cost of the property.
It is immaterial whether or not the contract of sale specifies that the sale price has been reduced by, or is in any way intended to reflect, real estate taxes allocable to the seller under section d. If the earliest lot purchased or acquired is held in a stock certificate that represents multiple lots of stock, and the taxpayer does not adequately identify the lot from which the stock is sold or transferred, the stock sold or transferred is charged against the earliest lot included in the certificate.
See paragraphs c 2 , c 3 , and c 4 of this section for rules on what constitutes an adequate identification. However, the taxpayer may determine the basis of the stock by the actual cost per share if the taxpayer notifies the broker in writing of this intent. The taxpayer must notify the broker by the earlier of the date of the sale of any of the stock for which the taxpayer received the confirmation or one year after the date of the confirmation. A broker may extend the one-year period but the taxpayer must notify the broker no later than the date of sale of any of the stock.
An adequate identification is made if it is shown that certificates representing shares of stock from a lot which was purchased or acquired on a certain date or for a certain price were delivered to the taxpayer's transferee. Except as otherwise provided in subparagraph 3 or 4 of this paragraph, such stock certificates delivered to the transferee constitute the stock sold or transferred by the taxpayer. Thus, unless the requirements of subparagraph 3 or 4 of this paragraph are met, the stock sold or transferred is charged to the lot to which the certificates delivered to the transferee belong, whether or not the taxpayer intends, or instructs his broker or other agent, to sell or transfer stock from a lot purchased or acquired on a different date or for a different price.
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If stock identified under subparagraph 3 or 4 of this paragraph as belonging to a particular lot is sold, transferred, or distributed, the stock so identified shall be deemed to have been sold, transferred, or distributed, and such sale, transfer, or distribution will be taken into consideration in identifying the taxpayer's remaining stock for purposes of subsequent sales, transfers, or distributions.
Paragraphs 1 through 5 , 8 , and 9 of this section apply to the sale or transfer of bonds. The specification of the lot number shall be made either -. The confirmation document must describe the securities and specify the date of the transaction and amount of securities sold or transferred.
For purposes of this paragraph c , an adequate identification of stock is made at the time of sale, transfer, delivery, or distribution if the identification is made no later than the earlier of the settlement date or the time for settlement required by Rule 15c under the Securities Exchange Act of , 17 CFR A standing order or instruction for the specific identification of stock is treated as an adequate identification made at the time of sale, transfer, delivery, or distribution. A method of determining the basis of stock, including a method of identifying stock sold under this paragraph c and the average basis method described in paragraph e of this section, is not a method of accounting.
Therefore, a change in a method of determining the basis of stock is not a change in method of accounting to which sections and apply. Paragraphs c 1 , c 4 , c 6 , c 7 ii , c 7 iii a , c 8 , c 9 , and c 10 of this section apply for taxable years beginning after October 18, Notwithstanding paragraph c of this section, and except as provided in paragraph e 8 of this section, a taxpayer may use the average basis method described in paragraph e 7 of this section to determine the cost or other basis of identical shares of stock if -.
The taxpayer must report gain or loss using the method the taxpayer elects or, if the taxpayer fails to make an election, the broker's default method. See paragraphs e 9 i and e 9 v , Example 2, of this section. For purposes of this paragraph e , securities issued by unit investment trusts described in paragraph e 5 of this section are treated as shares of stock and the term share or shares includes fractions of a share. For purposes of this paragraph e , the term dividend reinvestment plan means any written plan, arrangement, or program under which at least 10 percent of every dividend within the meaning of section on any share of stock is reinvested in stock identical to the stock on which the dividend is paid.
A plan is a dividend reinvestment plan if the plan documents require that at least 10 percent of any dividend paid is reinvested in identical stock even if the plan includes stock on which no dividends have ever been declared or paid or on which an issuer ceases paying dividends.
A plan that holds one or more different stocks may permit a taxpayer to reinvest a different percentage of dividends in the stocks held. A dividend reinvestment plan may reinvest other distributions on stock, such as capital gain distributions, non-taxable returns of capital, and cash in lieu of fractional shares.
The term dividend reinvestment plan includes both issuer administered dividend reinvestment plans and non-issuer administered dividend reinvestment plans.
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Stock is acquired in connection with a dividend reinvestment plan if the stock is acquired under that plan, arrangement, or program, or if the dividends and other distributions paid on the stock are subject to that plan, arrangement, or program. Shares of stock acquired in connection with a dividend reinvestment plan include the initial purchase of stock in the dividend reinvestment plan, transfers of identical stock into the dividend reinvestment plan, additional periodic purchases of identical stock in the dividend reinvestment plan, and identical stock acquired through reinvestment of the dividends or other distributions paid on the stock held in the plan.
For purposes of this paragraph e 6 , dividends and other distributions declared or announced before or pending a corporate action such as a merger, consolidation, acquisition, split-off, or spin-off involving the issuer and subsequently paid and reinvested in shares of stock in the successor entity or entities are treated as reinvested in shares of stock identical to the shares of stock of the issuer. If a taxpayer withdraws stock from a dividend reinvestment plan or the plan administrator terminates the dividend reinvestment plan, the shares of identical stock the taxpayer acquires after the withdrawal or termination are not acquired in connection with a dividend reinvestment plan.
The taxpayer may not use the average basis method after the withdrawal or termination but may use any other permissible basis determination method. See paragraph e 7 v of this section for the basis of the shares after withdrawal or termination. Average basis is determined by averaging the basis of all shares of identical stock in an account regardless of holding period. However, for this purpose, shares of stock in a dividend reinvestment plan are not identical to shares of stock with the same CUSIP number that are not in a dividend reinvestment plan.
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The basis of each share of identical stock in the account is the aggregate basis of all shares of that stock in the account divided by the aggregate number of shares. Unless a single-account election is in effect, see paragraph e 11 of this section, a taxpayer may not average together the basis of identical stock held in separate accounts that the taxpayer sells, exchanges, or otherwise disposes of on or after January 1, In the case of the sale or transfer of shares of stock to which the average basis method election applies, shares sold or transferred are deemed to be the shares first acquired.
Thus, the first shares sold or transferred are those with a holding period of more than 1 year long-term shares to the extent that the account contains long-term shares. If the number of shares sold or transferred exceeds the number of long-term shares in the account, the excess shares sold or transferred are deemed to be shares with a holding period of 1 year or less short-term shares. Any gain or loss attributable to shares held for more than 1 year constitutes long-term gain or loss, and any gain or loss attributable to shares held for 1 year or less constitutes short-term gain or loss.
For example, if a taxpayer sells 50 shares from an account containing long-term shares and short-term shares, the shares sold or transferred are all long-term shares. If, however, the account contains 40 long-term shares and short-term shares, the taxpayer has sold 40 long-term shares and 10 short-term shares. The taxpayer must calculate the average basis of this stock by averaging together all identical shares of stock in the account on April 1, , regardless of holding period.
A taxpayer must apply section and the associated regulations dealing with wash sales of substantially identical securities in computing average basis regardless of whether the stock or security sold or otherwise disposed of and the stock acquired are in the same account or in different accounts. Unless a taxpayer revokes an average basis method election under paragraph e 9 iii of this section, if a taxpayer changes from the average basis method to another basis determination method including a change resulting from a withdrawal from or termination of a dividend reinvestment plan , the basis of each share of stock immediately after the change is the same as the basis immediately before the change.
See paragraph e 9 iv of this section for rules for changing from the average basis method. Accordingly, under paragraphs e 1 and e 7 i of this section, C may not average the basis of the 50 shares of H Company with the basis of the shares of H Company. Under paragraph e 1 i of this section, C may not use the average basis method for the 50 shares of H Company because the shares are not acquired in connection with a dividend reinvestment plan.
This paragraph e 8 i does not apply to shares the taxpayer acquires as a result of a taxable dividend or capital gain distribution on the gift shares. The taxpayer must provide this statement when the taxpayer makes the election under paragraph e 9 of this section or when transferring the shares to an account for which the taxpayer has made this election, whichever occurs later. The statement must be effective for any gift shares identical to the gift shares to which the average basis method election applies that the taxpayer acquires at any time and must remain in effect as long as the election remains in effect.
See paragraph e 9 ii of this section. See paragraph e 9 i of this section. A taxpayer makes an election to use the average basis method for shares of stock described in paragraph e 1 i of this section that are covered securities within the meaning of section g 3 by notifying the custodian or agent in writing by any reasonable means.
For purposes of this paragraph e , a writing may be in electronic format. A taxpayer has not made an election within the meaning of this section if the taxpayer fails to notify a broker of the taxpayer's basis determination method and basis is determined by the broker's default method under paragraph e 2 of this section. A taxpayer may make the average basis method election at any time, effective for sales or other dispositions of stock occurring after the taxpayer notifies the custodian or agent. The election must identify each account with that custodian or agent and each stock in that account to which the election applies.
The election may specify that it applies to all accounts with a custodian or agent, including accounts the taxpayer later establishes with the custodian or agent. If the election applies to gift shares, the taxpayer must provide the statement required by paragraph e 8 ii of this section, if applicable, to the custodian or agent with the taxpayer's election.
A taxpayer may make the election on an amended return filed no later than the time prescribed including extensions for filing the original return for the taxable year for which the election applies. The taxpayer must indicate on the return that the taxpayer used the average basis method in reporting gain or loss on the sale or other disposition. A taxpayer must attach to the return the statement described in paragraph e 8 ii of this section, if applicable.
A taxpayer making the election must maintain records necessary to substantiate the average basis reported. A taxpayer may revoke an election under paragraph e 9 i of this section by the earlier of one year after the taxpayer makes the election or the date of the first sale, transfer, or disposition of that stock following the election.