Basis

• If a person acquires a stock through means other than purchasing it, the IRS determines his basis in accordance with the circumstances leading up to the acquisition. If a taxpayer receives stock as payment for services he performs, for instance, the IRS requires him to include the fair market value of the stock as income on his federal taxes. The IRS then considers the amount claimed as income to equal the person's basis in the stock. If, on the other hand, a husband transfers the ownership of a stock to his wife, the IRS views the wife's basis in the security as equal to the amount her husband claimed as his basis.
  
  

Adjusted Basis

• A taxpayer must adjust his basis in a stock in accordance with specific events that occur after he purchases the security such as a stock split or the issue of stock rights or stock dividends. If a company issues a stock dividend to its stockholders, for instance, a recipient of the dividend calculates his adjusted basis in the security by dividing his basis by the total number of stocks he owns after the issue. For example, if a person purchases 100 shares of a company's stock for $10 each, including commissions and related fees, his basis in the stock equals $1,000, or $10 per share. When he receives an additional 10 shares as the result of the company issuing a stock dividend, the taxpayer's adjusted basis is $9.09, or $1,000 divided by 110.
  
  

S Corporation Stock

• The basis of stock issued by an S corporation fluctuates in concert with the company's performance, meaning a person who owns this kind of stock must calculate his adjusted basis annually in an order prescribed by the IRS. A stockholder will first increase his basis by his share of the corporation's income items and excess depletion. He will then decrease his basis by his pro rata share of distributions and non-deductible, non-capital expenses and depletion. Finally, he will subtract his share of the corporation's items of loss and deduction to determine his adjusted basis.
  
  

Gains and Losses

• To determine whether a person realizes a gain or loss when he sells a stock, he subtracts his adjusted basis from the amount he receives in exchange for it. If a person's adjusted basis in a stock is $75 and he receives $100 when he sells the security, he records a gain of $25. Comparatively, if the person receives only $25 for his stock, he records a loss of $50.