Financial Records – Investments

Like your bank records, you’ll need to start files for all of your investment accounts and stash your monthly statements in the appropriate files.  Make sure you have plenty of space available.  Investment sales may trigger the capital gains tax so you must keep records to substantiate the amount of your gain.  Save all paperwork on the purchase of the investment, its sale, and any activity that occurs in between.  Since you must keep these records for several years after you sell, you could be holding on to these files for many years.

But saving investment records is a tax-saving necessity.  Commission charges, fees, and reinvested dividends and capital gains increase your basis in the investment and reduce the tax bill when you sell.  However, not all fees increase your tax basis.  Most brokerage fees must be deducted as a miscellaneous itemized deduction subject to the 2% floor.

Let’s say, for example, you bought $1,000 worth of shares in a mutual fund and instructed the fund manager to reinvest your dividends every year.  In the first year, the fund paid $100 in dividends which were reinvested in additional shares.  And even though you never actually held that $100 in your hand, you must pay income tax on it come April 15. However, if the dividends are tax-exempt, they generally are not added to your tax basis.

Now imagine a few years have passed.  You have reinvested a total of $200 in dividends, paid your taxes, and kept meticulous records.  Your $1,000 investment now has a cost basis of $1,200 due to those reinvested dividends.  If you sell your shares for $1,500 your gain is $300.  Many a taxpayer have overlooked those reinvested dividends and paid Uncle Sam twice.  Don’t let it happen to you.  Hold on to all of your investment records for at least three years after you sell.