Most of you have heard the term "cost basis" - but what is it? The cost basis of your investments is the amount you originally purchased them for. Most people think their cost basis information is automatically tracked for them. Although it should be - that isn’t always the case. Therefore, it’s crucial you proactively keep track of your own cost basis for each transaction you make.
One of the most important reasons you should maintain a record of your cost basis is for any potential future tax implications that might arise. You should keep track of original purchase prices on all mutual funds, stocks, etc. This is necessary because the capital gains tax rate for the difference between the selling price and purchase price is completely different than the tax rate for normal income. If not properly tracked, you may be in violation of tax laws, which could result in substantial tax penalties.
At the beginning of every year, you’ll start receiving various tax statements. If you create a simple spreadsheet, and enter each transaction, this will assist in comparing what you record with the statements you receive. Bottom Line: this will make filing your taxes easier and safer.