Why Does Etrade Show an Incorrect Cost Basis for My Stock Sales?

ETRADE users sometimes notice discrepancies in the cost basis of their stock sales, which can create confusion when reviewing gains and losses. Since cost basis is key to calculating investment taxes, inaccuracies can affect tax reporting and financial planning.

Several factors can cause ETRADE’s reported cost basis to differ from expectations, including calculation methods, corporate actions, reinvested dividends, and IRS rules like wash sale adjustments.

Calculation Methods

Brokerage platforms use different methods to determine cost basis, which can lead to differences from personal calculations. Investors may assume shares are sold in a certain order, but platforms apply default methods unless a different one is specified. These choices affect how gains or losses are calculated and reported.

First-In, First-Out

The First-In, First-Out (FIFO) method assumes the earliest shares purchased are the first to be sold. This can impact taxable gains, especially in a rising market where older shares typically have a lower purchase price. If an investor bought 100 shares at $50 each in 2015 and another 100 at $100 in 2020, selling 100 shares under FIFO would assign the $50 cost basis, potentially increasing taxable gains if the sale price is higher. The IRS considers FIFO the default method unless an investor selects another. While simple, it may not always be the most tax-efficient approach.

Last-In, First-Out

The Last-In, First-Out (LIFO) method assumes the most recently purchased shares are sold first. This can be useful in a declining market, as it often results in lower taxable gains or even capital losses if the latest shares were bought at a higher price than the sale price. Suppose an investor purchased shares at $50, then $100, and later $120. Selling at $80 under LIFO would assign the $120 cost basis, creating a $40 capital loss per share. Unlike FIFO, LIFO is not the default and must be selected. While it can help manage taxable income, it may not align with an investor’s long-term strategy.

Specific Share Identification

This method allows investors to choose which shares to sell, offering more control over cost basis. By selecting higher-cost shares, investors can minimize taxable gains, while choosing lower-cost shares may maximize reported profits for tax planning. To use this method, investors must notify their broker at the time of sale. If they don’t, ETRADE may default to FIFO or another preselected method.

For example, if an investor owns shares purchased at $50, $100, and $120, selling the $100 shares first could reduce taxable gains compared to FIFO or LIFO. This approach requires careful record-keeping to comply with IRS rules, as failing to designate shares properly can lead to unintended tax consequences.

Effects of Corporate Actions

Corporate actions can alter cost basis, sometimes in ways investors don’t immediately recognize. Stock splits, mergers, spin-offs, and reorganizations can all modify the original purchase price of shares.

Stock splits increase the number of shares while reducing the per-share cost basis. In a 2-for-1 split, an investor who originally bought 100 shares at $50 each will now own 200 shares at a cost basis of $25 per share. Reverse stock splits have the opposite effect, decreasing the number of shares while raising the per-share cost basis.

Mergers and acquisitions can complicate cost basis further, especially when shareholders receive stock in a new company in exchange for existing shares. If a company merges with another and offers shares of the new entity, the cost basis of the original investment must be allocated based on the merger terms. For instance, if an investor holds 100 shares of a company that merges at a 1.5:1 ratio, they would receive 150 shares of the new company. The original cost basis must then be divided among the new shares.

Spin-offs present another challenge, as they involve a parent company distributing shares of a new subsidiary to existing shareholders. The IRS requires investors to allocate part of their original cost basis to the new shares based on the relative market values at the time of distribution. If a company spins off a division, investors must determine how much of their original purchase price applies to the new entity. This can be complex, especially if the brokerage doesn’t update cost basis figures immediately.

Tracking Reinvested Dividends

When dividends are reinvested instead of taken as cash, cost basis changes with each reinvestment. Each reinvestment is treated as a separate purchase, creating multiple acquisition dates and purchase prices that must be tracked for tax reporting.

For example, if an investor buys 100 shares at $50 each and receives a quarterly dividend of $1 per share, reinvesting that $100 may buy additional shares at the current market price. If the stock is trading at $55 when the dividend is reinvested, the investor acquires 1.82 more shares. Over time, this process repeats, creating a mix of shares bought at different prices. When shares are sold, failing to account for these reinvestments can lead to incorrect capital gains calculations.

ETRADE reports reinvested dividends on 1099-DIV and 1099-B tax forms, but discrepancies can occur if past transactions weren’t recorded properly. Investors relying solely on brokerage statements may miss adjustments from prior years, especially if they transferred accounts. The IRS requires cost basis reporting for stocks acquired after 2011, but shares purchased earlier may not have complete records unless investors maintained their own documentation.

Wash Sales

The wash sale rule, outlined in IRS Publication 550, prevents investors from claiming a tax-deductible loss on securities if they repurchase a substantially identical asset within 30 days before or after the sale. If a wash sale occurs, the disallowed loss is added to the cost basis of the repurchased shares, deferring the deduction until the new shares are sold.

ETRADE automatically applies wash sale adjustments when transactions trigger the rule, but discrepancies can arise if an investor holds the same security across multiple accounts. For example, if shares are sold in a taxable brokerage account at a loss and repurchased in an IRA within the restricted period, the loss is permanently disallowed rather than deferred. These cross-account wash sales are not always tracked by brokerages, requiring investors to monitor their own trades to avoid unexpected tax consequences.

Why 1099 Figures Differ From Custom Calculations

Investors often find that the cost basis reported on their ETRADE 1099-B tax form doesn’t match their own records. These discrepancies stem from differences in accounting methods, tax regulations, and required adjustments.

One reason for differences is that ETRADE follows IRS-mandated cost basis reporting rules, which may not align with an investor’s preferred tracking method. For example, if an investor manually calculates gains using the average cost method but ETRADE defaults to FIFO, the reported taxable gain could be significantly different. Additionally, brokerages only report cost basis for stocks acquired after 2011 and mutual funds after 2012, meaning older holdings may lack complete basis information unless manually tracked. Transfers from other brokerages can also lead to inconsistencies if cost basis data isn’t properly carried over, requiring investors to verify and adjust their records.