Overview

When you sell securities that you accumulated over several years, the cost basis must reflect every event that changed your ownership or per‑share cost: subsequent purchases, stock splits, reinvested dividends (DRIPs), mergers, and wash‑sale disallowed losses. Brokers report sales on Form 1099‑B and the IRS receives that data; if the broker’s basis is wrong you can and should correct it before or after filing (see IRS guidance on Form 8949 and 1099‑B) (IRS, About Form 8949: https://www.irs.gov/forms-pubs/about-form-8949; About Form 1099‑B: https://www.irs.gov/forms-pubs/about-form-1099-b).

Step‑by‑step: How to fix cost basis errors

  1. Gather records
  • Get trade confirmations, monthly or annual statements, and DRIP records that show dates, number of shares, and prices for every lot. If you’re missing history, request a transaction history from your broker; they can usually pull multi‑year data.
  • Keep your original 1099‑B and any “corrected” 1099‑B the broker issues.
    (IRS on recordkeeping: https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping)
  1. Identify what changed basis
  • Additional purchases (different lots).
  • Corporate actions (splits, mergers, spin‑offs).
  • Dividend reinvestments (average cost allowed for mutual funds/DRIPs; not generally for most individual stocks).
  • Wash‑sale adjustments from disallowed losses that shift basis into replacement shares.
  1. Choose the correct lot‑identification method
  • Specific identification (you identify which lots were sold) — most tax‑efficient when you can prove it.
  • FIFO (first‑in, first‑out) — default for many brokers if you don’t specify.
  • Average cost — allowed for mutual funds and many dividend reinvestment plans, not generally for individual stock trades. Check broker policies and IRS rules.
    (See IRS Topic 409; consult broker docs.)
  1. Recompute basis and fill Form 8949 / Schedule D
  • Use adjusted per‑share cost (total adjusted basis ÷ adjusted share count). For example:
  • Initial purchase: 10 shares @ $50 = $500
  • Later purchase: 5 shares @ $70 = $350
  • Total cost before split = $850 for 15 shares
  • 2‑for‑1 split → 30 shares; cost per share = $850 / 30 ≈ $28.33
  • Enter each sale on Form 8949, checking the correct box (a, b, or c) for whether the basis was reported to the IRS and whether you have adjustments.
    (Instructions for Form 8949: https://www.irs.gov/forms-pubs/about-form-8949)
  1. Ask your broker for a corrected 1099‑B if possible
  • If the error originated with the broker’s reporting, request a corrected 1099‑B. Brokers will sometimes reissue a corrected form which simplifies filing and reduces audit risk.
  1. If you already filed and the error changed tax due, file Form 1040‑X
  • Use Form 1040‑X to amend a prior return and include a corrected Form 8949 and Schedule D showing the fixed basis and tax recalculation. Attach broker correspondence if available.
  • Generally amend only if the correction changes your tax liability or if the IRS has questioned the return. (IRS Publication and instructions for Form 1040‑X.)

When to amend vs. correct before filing

  • Correct before filing if you have time and the broker will issue corrected 1099‑B.
  • Amend (Form 1040‑X) if you discover an error after filing and the corrected basis changes tax owed or refund amount.

Common pitfalls and special rules

  • Wash‑sale rule: If you sold at a loss and bought substantially identical securities within ±30 days, the disallowed loss is added to the basis of the replacement shares. That shifts basis forward and can be easy to miss if purchases span years.
  • Average cost: Allowed for mutual funds/DRIPs — verify with your broker. Using the wrong method can understate gains.
  • Broker reporting: Brokers must report basis for many covered securities; however, their data can still be wrong. Always verify.

Practical example (multi‑year sale)

  • You bought 10 shares in 2016 @ $50 ($500), 5 shares in 2018 @ $70 ($350). Total cost = $850 for 15 shares. In 2020 the stock split 2‑for‑1 so you now own 30 shares. If you sell 12 shares in 2024, per‑share basis = $850 / 30 = $28.33; basis for 12 shares = $340. Add any wash‑sale or corporate adjustments before calculating gain or loss.

When to involve a pro

  • If lots span many years, include mergers/spin‑offs, or involve wash‑sale adjustments, consult a CPA or enrolled agent. In my practice I’ve seen small basis errors produce large tax differences when reinvested dividends and multiple splits weren’t accounted for — a timely review prevented an overstated capital gain and a substantial tax bill.

Tools, evidence and internal resources

Authoritative sources

Professional disclaimer
This article is educational and not personalized tax advice. For a correction that affects your tax liability, consult a CPA, EA or the IRS directly.

Estimated reading level: targeted grade 8–10.