Adjusted basis is the original cost of an item adjusted for certain events. These events might increase or decrease your basis. They include:
- Undistributed capital gains (Form 2439) — A mutual fund company will usually issue a Form 2439. If you receive a 2439, increase your basis by the difference between these two amounts:
- Amount included in income (Box 1a)
- Amount of the credit for taxes paid (Box 2)
To learn more, see the Undistributed Capital Gains tax tip.
- Return of nontaxable capital distributions — Reduce your basis by the amount of return of capital. Don’t reduce your basis below zero. This should be nontaxable distributions you receive from the mutual fund or stock. These distributions are on Form 1099-DIV, Box 3. They aren’t the same as capital gain distributions or exempt-interest dividends. To learn more, see the Nontaxable Distributions tax tip.
- Wash sales — Increase the basis by the amount of loss you can’t claim due to wash sale rules. To learn more, see the Wash Sales tax tip.
- Nontaxable stock dividends — This only affects the basis of stock. Decrease the basis of the stock you hold based on the stocks you received as a dividend. To learn more, see the Stock Dividends tax tip.
- Stock splits — This only affects the basis of stock. Decrease or increase the basis of stock you hold based on the stock split. If you received more shares, your per-share basis will decrease. If you now own fewer shares due to a reverse split, then you must increase your per-share basis. To learn more, see the Stock Splits tax tip.
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The first step in how to calculate long-term capital gains tax is generally to find the difference between what you paid for your property and how much you sold it for —adjusting for commissions or fees. Depending on your income level, your capital gain will be taxed federally at either 0%, 15% or 20%.