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Yes, I would like to say that my cost basis is lower than it actually was (and thus pay more taxes).

Quick story, which I think is mostly correct (but I can't remember all details):

I own shares of the GLD ETF. I believe that a very small amount (I think about .001 per share) is sold each year by the issuer to cover expenses. Thus I need to pay taxes on my gains on those shares. If I owned 100 shares (worth about $13,000), then the amount sold would be about .1 shares, or about $13 worth.

I don't even remember the entire process, but it was confusing and time-consuming to figure out the exact cost basis (it was not just the acquisition cost - I had to find random tables, and enter a lot of data into Turbotax, I think because they sell them every month).

Long story short, I spent at least a couple hours researching and entering this data. I ended up paying capital gains on something like $3, where if I just entered $0 as my cost basis, I'd pay capital gains on something like $12.

So is there any problem (legal or otherwise) with entering $0 as my cost basis, and thus paying more tax (while saving myself a lot of time)?

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2 Answers 2

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You sign under penalty of perjury that your tax return is correct.

That said, if the misstatement is in government's favour, and in such relatively insignificant amounts (relatively, since there's no materiality threshold for tax issues), I would guess that no-one will go after you, even if discovered. If audited, let the auditor do the calculations, and then have them make the adjustments in your favour:).

To be sure you can consult a licensed tax professional (EA/CPA licensed in your state).

I'm assuming this is for the US tax return, but is probably relatively similar everywhere else.

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    You are absolutely correct. I've run into cases where one can't find their cost basis on a stock from so long ago that the cost of research is probably higher than the tax cost of claiming zero basis. Logic says there can't be a penalty for claiming zero basis, when it might really be a bit higher. I'd never advise to pay too little tax and hope for no audit, but paying too much because of this type of situation would have no consequence. If audited, they'll ignore this type of overpayment. Oct 4, 2013 at 17:16
  • Thanks. Could this trigger any flags (automated or not), and make it more likely that I am audited? (Not that I have anything to hide!)
    – Jer
    Oct 4, 2013 at 17:52
  • @jer I can't think of any. The automation looks for underreporting, so when they do their matching they expect your income to be at least as what they know. Which in your case will be fine.
    – littleadv
    Oct 4, 2013 at 17:53
  • @JTP-ApologisetoMonica ignore? is that to avoid audit honeypots?
    – user12515
    Feb 4, 2020 at 5:42
  • It’s simply because there is nothing to be gained by a dispute. Say I have a $10K cap gain, and the purchase ‘might have been 30-35 years ago’. That amount of time represents a potential 4 ‘doubles’ or a 16X return. Perhaps my cost was $600. Just giving up and claiming a zero basis would cost me an extra $72. The IRS agent would hear “this is one stock I can’t find basis, and to be safe, just said $0”. He might be surprised, but there’s no point to deny that choice. Getting a bona-fide accurate number might be far more costly that that $72. Feb 5, 2020 at 0:13
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This isn't foolproof, but from Publication 4491 (Rev. 10-2021), page 122:

What is the basis of stock?

Basis

In order to compute gain or loss on a sale, taxpayers must provide their basis in the sold property.
The basis of property is usually its cost.

  • If taxpayers need help determining their basis and do not have the original purchase documents, refer them to Publication 551 and their stockbroker.
  • If taxpayers cannot provide their basis in the property, the IRS will deem it to be zero.

With the understanding that:

  • The section title says "stocks" and not "securities"

  • It's unclear to me if it's talking about what the IRS will do or whether it's talking about what you should do

...my common sense (although I am not a lawyer) tells me that it would be sufficient defense for you to point to this clause in the IRS's own guidance as justification for putting zero as your cost basis.

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  • Just FYI, re your last sentence: the US Tax Court has ruled, on more than one occasion IIRC, that the IRS publications are not in fact a legal authority and cannot be relied upon in a tax case. Just sayin....
    – littleadv
    Dec 30, 2021 at 1:01
  • @littleadv: That's just needless fearmongering. "Relied on" how? You'll need a citation with a good example to make a remotely compelling case here. It might not prevent you from having to pay (or take back, in this case) the correct tax, but prosecution? When this was clearly done in good faith to the best of their effort in the government's favor? Even perjury requires "material" matters for the crime to apply, and a judge would not consider ~$3 to be "material". Don't forget Maslenjak v. US on immaterial false statements w.r.t. citizenship.
    – user541686
    Dec 30, 2021 at 2:15
  • Hey, just saying that pubs can't actually be "sufficient defense", that's what you claimed. I already said that there's unlikely to be any side effect in this scenario almost 10 years ago, see my answer from 2013.
    – littleadv
    Dec 30, 2021 at 2:22
  • @littleadv: No, that's not what I claimed, you're putting words in my mouth. I never said IRS pubs can be sufficient defense in general. I said this pub can be sufficient defense in this case.
    – user541686
    Dec 30, 2021 at 3:03
  • Probably not. If you get to a stage where you actually need to defend your position (which in this case is unlikely), no pub can serve as a legal authority for your defense. But since we both agree that in this case it is unlikely to happen then the argument is moot.
    – littleadv
    Dec 30, 2021 at 5:06

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