Selling stocks and mutual fund shares

For stock lots you adequately identify at sale, use their individual acquisition cost or other applicable basis. This rule also applies when you adequately identify bonds you sold. Your basis therefore follows the particular securities you identify.

If you buy and sell securities at different times and in different quantities, you may be unable to adequately identify the shares you sell. In that situation, your basis is the basis of the securities you acquired first. Without adequate share identification, you follow acquisition order.

Generally, you can use average basis for stock in most mutual funds or other regulated investment companies. To qualify under this rule, you must leave the shares with a custodian or agent in an account. You must also acquire identical shares at different prices in that account.

You can also generally use average basis for stock acquired after 2010 through a dividend reinvestment plan that meets the requirements of Regulations section 1.1012-1(e)(6). The same account conditions apply. Eligibility requires you to keep an account under custodial or agency care, purchasing identical stock there for differing amounts.

When you figure average basis, you include all unsold shares of identical stock in the account. Even with average basis, your sale may produce both short term and long term gains or losses. For your holding period, the shares you dispose of are considered to be the shares you acquired first.

Your average basis calculation and your holding period therefore use different features of your shares. For this calculation, you pool every identical share still owned within that account. The holding period determination treats the shares sold as those you acquired first.

You may receive a return of principal, also called a return of capital or a nondividend distribution. This payment returns part of your original investment cost and reduces your basis. Your return of capital is not taxed until after it reduces your basis to zero.

If you cannot identify specific shares, you reduce the basis of your earliest stock purchases first. You may receive information about the payment in box 3 of Form 1099 DIV. The payment's effect on your basis depends on the return of your original investment.

Once you have adjusted your basis to zero, you report additional returns or distributions, other than dividend distributions, on Schedule D and Form 8949. If you held the stock longer than a year, you report any gains as long term capital gains.

For 2026, your capital gains distributions from a mutual fund or ETF are taxed at long term capital gains rates of 0%, 15%, or 20%, regardless of how long you held the fund. If you hold the fund in a taxable brokerage account, you can have a tax bill from these year end payouts even when you never sold a share. You can also have that tax bill in a year when the fund fell in value.

If you reinvest a capital gains distribution, you still have a taxable distribution in the year you receive it. This remains true even though the cash buys additional shares. Your reinvested amount becomes the cost basis of those new shares.

If you hold an ETF, you can receive capital gains distributions. ETFs often distribute fewer gains than comparable mutual funds because most ETFs use a creation and redemption process that transfers appreciated securities in kind. Through that process, the fund moves appreciated securities out without selling them, resulting in fewer gains realized inside the fund.

When your restricted stock units, or RSUs, vest, their full value is taxed as your W 2 wages. That taxed value becomes your cost basis in the shares. When you later sell, only growth since vesting should be taxed again as capital gain.

Under a 2014 change to broker basis reporting regulations, brokers reporting sales of shares acquired through equity compensation are generally required to report only the cash you paid. They exclude the compensation income component. For your RSUs, you paid no cash, so your Form 1099 B can show zero basis, leave the box blank, or mark basis as not reported to the IRS.

Your broker can comply with those reporting rules while reporting zero basis, and the IRS receives that same zero. Your RSU basis is the shares' value on the vesting date, representing income you already paid tax on. If you use the reported zero as your basis, you can pay tax on the same dollars twice.

If you sold stocks, bonds, or certain commodities through a broker, you should receive Form 1099 B or a substitute statement. When completing Form 8949, you must enter the proceeds shown on Form 1099 B, Form 1099 DA, Form 1099 S, or a substitute statement in column (d), enter the basis shown on Form 1099 B, Form 1099 DA, or a substitute statement in column (e) if it indicates that basis was reported to the IRS, and make any needed corrections or adjustments in column (g). You must report all taxable sales of stocks, bonds, commodities, and similar property on Form 8949 or Schedule D, or both, as applicable, even without that broker statement.

On Form 8949, you enter the date you sold or disposed of the property in the sale date column. For stocks and bonds traded on an exchange or an over the counter market, you use the trade date. For a short sale, you enter the date you delivered the property to the broker or lender to close the short sale.

Generally, you must make estimated tax payments for the current tax year if you meet both of the following conditions. Your expected balance after withholding and refundable credits must meet the dollar threshold. Your expected withholding and refundable credits must also fall below the applicable comparison amount.

For your S corporation stock basis, you start with your initial capital contribution or the initial cost of stock you purchased. You then adjust that amount for amounts passed through from the corporation. Income increases your stock basis, while losses, deductions, and distributions decrease it.

Your Schedule K 1 reflects the S corporation's income, loss, and deduction items allocated to you for the year. It also shows any nondividend distribution you receive. It does not state the taxable amount of that distribution, which depends on your stock basis.

If you receive a nondividend distribution from an S corporation, you receive it tax free to the extent it does not exceed your stock basis. Your debt basis does not count when determining whether the distribution is taxable. A nondividend distribution exceeding your stock basis is taxed as capital gain on your personal return. Your excess distribution qualifies for long term capital gain treatment after more than one year of S corporation share ownership.