cost basis

Forum|Forum|5 years ago
April 22, 2021
4 replies
11 views

Suppose I invest $21,000 in a privately held start-up company and receive 21,000 shares of preferred stock (par value of $1 per share) and 10,000 shares of common stock. The Company has agreed to redeem all shares of preferred stock prior to making any dividends or redemptions of common stock. There is no public market for either security.

At some later date, should I want to sell some of the common stock, how do I determine the cost basis of the common stock sale? Can I choose to allocate the original total cost anyway I like between the common and preferred?

DaveF1006

Level 15

For your common stock, please read this Turbo Tax link for information on stocks received as a gift, which is applicable in your particular case. "The cost basis of stock you received as a gift ("gifted stock") is determined by the giver's original cost basis and the fair market value (FMV) of the stock at the time you received the gift.

If the FMV when you received the gift was more the original cost basis, use the original cost basis when you sell. This is the most commonly-encountered situation.
If the FMV when you received the gift was less than the original basis, and you later sold the stock for:
- More than the original basis, use the original basis.
- More than the original basis but less than the FMV at the time of the gift, your selling price becomes the cost basis. You won't report a gain or loss in this situation.
- Less than the FMV at the time of the gift, use the FMV at the time of the gift."
The par value of the stocks have nothing to do with the actual basis. In the case of equity, the par value has very little relation to the shares' market price. Par value is also known as nominal value or face value.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

GMittlemanAuthor

Level 2

i don't think your answer addresses my question

DaveF1006

Level 15

It depends. What is the value of the stocks when you took ownership of them? Is it the $1 par value or or are they valued at a different Fair Market Value. There could be a difference.

**Say "Thanks" by clicking the thumb icon in a post. **Mark the post that answers your question by clicking on "Mark as Best Answer"

NCperson

Level 15

@GMittleman - did you ask the company how they valued it? certainly they know,