The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. If you get stocks or bonds other than by purchase, your basis is usually determined by the FMV or the previous owner's adjusted basis, as discussed earlier.

You must adjust the basis of stocks for certain events that occur after purchase. For example, if you get additional stock from nontaxable stock dividends or stock splits, reduce the basis of your original stock. Also reduce your basis when you get nontaxable distributions. They are a return of capital.

Example. In 1996 you bought 100 shares of XYZ stock for $1,000 or $10 a share. In 1997 you bought 100 shares of XYZ stock for $1,600 or $16 a share. In 1998 XYZ declared a 2-for-1 stock split. You now have 200 shares of stock with a basis of $5 a share and 200 shares with a basis of $8 a share.

Other basis. There are other ways to figure the basis of stocks or bonds depending on how you acquired them. For detailed information, get Publication 550.

Identifying shares. If you buy and sell securities at different times in varying quantities and you cannot definitely identify the securities you sell, figure the basis of those sold under the first-in, first-out method--that is, the first securities you acquired are the first sold. For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550.

Mutual fund shares. You can choose to use the average basis of shares you own in a regulated investment company (mutual fund) if you acquired the shares at various times and prices. For more information about figuring the basis of mutual fund shares, see Publication 564.

Bond premiums. If you buy a taxable bond at a premium and choose to amortize the premium, reduce the basis of the bond by the amortized premium you deduct each year. See Bond Premium Amortization in chapter 3 of Publication 550 for more information. Although you cannot take a deduction for the premium on tax-exempt bonds, you must amortize the premium each year and reduce your basis in the bonds by the amortized amount.

Original issue discount (OID) on debt instruments. You must increase your basis in an OID debt instrument by the OID you include in income for that instrument. See Original Issue Discount in chapter 8.

Tax-exempt bonds. OID on tax-exempt bonds is not taxable. However, there are special rules for figuring basis on these bonds issued after September 3, 1982, and acquired after March 1, 1984. See chapter 4 of Publication 550.

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