| Record-Keeping for Investments |
Are you under a paper deluge? How long do you really need to keep records for your investment securities and what exactly do you need to retain?
The answer depends on how you acquired the investment in question. First, the original trade confirmation at the time of purchase is required to be retained until at least three years after you file the tax return reporting the gain or loss.
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If the investment was one that you inherited, you should retain a copy of the estate tax return for three years beyond the filing date of the tax return reporting the last sale of any investment that you inherited from the deceased person (or any investment whose value is derived from the inherited asset such as tax-free mergers with carryover basis.)
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"Many of life's failures are people who did not realize how close they were to success when they gave up."
-- Thomas Edison, American inventor
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| Pile of Paper |
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| Since July 2015, executors of estates that file estate tax returns are required to provide beneficiaries with Schedule A of Form 8971 "Information Regarding Beneficiaries Acquiring Property From a Decedent." This Schedule A lists the property received by each beneficiary and the estate tax value that becomes the cost basis for the beneficiary. This new required reporting will document the new cost basis for each beneficiary without having to obtain a copy of the complete estate tax return.
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The time limit is normally three years after the filing date of your tax return (including extensions), but if you have omitted more than 25% of your income, the IRS now has a Six Year Audit Limit to examine your return and records. That means you have to keep your records for up to six years if you are skirting the edge when reporting your taxes.
If you acquired the investment through a merger or spinoff, you would need to keep the original trade confirmation for the original "parent" security for three years after you sell the merger/spinoff stock and report it on your tax return. Keep the tax information statement provided by the company for corporate reorganizations. If no tax information statement was provided, keep the cover page and the "Material U.S. Federal Income Tax Consequences" section from the prospectus.
Subsequent changes such as splits can be obtained from public records.
In the absence of the trade confirmation, the trade entry in the activity section of your monthly account statement will be acceptable to the IRS. However, it is easier to keep one piece of paper such as a trade confirmation, rather than stacks of monthly account statements.
For Master Limited Partnerships, keep the Form K-1 for every year since you bought it so that you can prove the roll-forward cost basis from the changes in the capital account each year.
For Royalty Trusts, keep the depletion worksheets for every year you owned it so that you can prove the roll-forward cost basis.
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