from https://www.marketwatch.com/story/i-have-a-huge-tax-bill-because-of-capital-gains-could-there-be-a-mistake-a0890cfc

Opinion: I have a huge tax bill because of capital gains. Could there be
a mistake?
Don’t panic, this may be a common brokerage error
By
Dan Moisand
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Published: April 22, 2025 at 1:38 p.m. ET

The investment firm may say all of the gain is taxable — first look at
the cost basis.
The investment firm may say all of the gain is taxable — first look at
the cost basis.
Photo: Getty Images

Dear Dan,
I’m doing my taxes and I have a huge tax bill because of capital gains.
Last year, I sold some holdings I inherited in 2010. I expected some
gains but these were way higher. Looking at the report from my
investment firm, they say all of the sale is taxable gain. Can that
possibly be right?
— Sticker Shock

Dear Sticker Shock,
It could be right, but I wouldn’t panic. Chances are good that is not correct.

Brokerage firms have only been required to track the “cost basis” of investments acquired since Jan. 1, 2011. The requirement was effective
in stages between 2011 and 2013. If you had not supplied the basis to
them, they would not have it to calculate the gain. The term for such
holdings is “uncovered” securities.

You said the entire sale is showing as a gain. That suggests the report
is showing a zero cost-basis. Many brokerages report uncovered
securities as having a zero basis. Many of these reports will have an
asterisk or footnote that mentions that the securities are uncovered,
and the firm does not have the basis.

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If you know the basis, you do not need to get that information to the
brokerage firm and have the report corrected. However, there is an
adjustment process found in the instructions for Form 8949 That should
be used. Whatever basis you have will reduce the gain.

If you have other holdings that were acquired in taxable accounts before
the 2011-2013 phase in for the reporting requirements, you should
acquire the basis information for those holdings. Then, contact the
brokerage firm and have that information added to your records. This
will prevent future reports from overstating gains again by calculating
the gain off a zero basis.

Your basis is the cost you paid for the shares of the security in
question. In your case, however, you said you inherited the shares. This
means you may have no idea what the shares cost originally. Fortunately,
that is probably not important. By inheriting the asset, you are likely entitled to receive a “step up in basis.” Instead of using the original cost to calculate the gain, you use the value at the date of death.

For instance, say your benefactor left you shares worth $20,000 that
were bought for $5,000 and you sold those shares for $50,000. Due to the
step up in basis at death, you calculate the gain based on the value on
the date of death. So, the gain is $30,000 ($50,000-$20,000), not
$45,000 ($50,000 – $5,000 original purchase cost).

Anyway, despite the time since enacting the reporting requirements,
paying taxes on overstated gains because an uncovered security showed a
zero cost basis on a report from a brokerage is a common error. One of
the first things we do when reviewing a return is look for zero basis
shares. For some securities, often as a result of a corporate action
like a spinoff, a zero basis is accurate. However, most of the time a
zero basis is the result of an uncovered security.

If you have a question for Dan, please email him with “MarketWatch Q&A”
on the subject line.

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About the Author

Dan Moisand
Dan Moisand
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Dan Moisand is a contributor to MarketWatch and a financial planner
atMoisand Fitzgerald Tamayoin Orlando, Fla.

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