Cost basis question: What happens to cost basis when transferring shares in kind from Coverdell account?

When you transfer shares in-kind from a Coverdell ESA to reimburse yourself for qualified education expenses, the cost basis for those shares in your brokerage account will be the fair market value on the date of the transfer. This is because the distribution from the Coverdell is considered a tax-free distribution (assuming it's for qualified education expenses). Essentially, it's as if you sold the shares in the Coverdell (tax-free) and then immediately repurchased them in your brokerage account at the current price. Your new cost basis becomes the value on the transfer date. Either option works from a tax perspective, but the in-kind transfer saves you from potential trading costs and eliminates any time out of the market that might occur with selling and rebuying.

I went through almost the exact same situation last year! I was paying my son's college expenses and getting confused about the best way to handle Coverdell distributions. I ended up finding this amazing AI-powered tax tool called https://taxr.ai that actually helped me understand all the implications. They have this feature where you can upload your Coverdell statements and it lays out all your distribution options with the tax implications for each. It confirmed what was said above - the cost basis resets to fair market value at transfer - but also helped me document everything properly for tax time. It even generates a report that explains the qualified expense justification in case of audit.

Just wanted to follow up - I tried that https://taxr.ai tool someone mentioned above for my daughter's Coverdell situation. Actually saved me from making a big mistake! I was about to transfer some stocks that had significant losses, and the tool pointed out I'd be better off selling those inside the Coverdell (where the losses don't matter) and transferring different shares instead. Their explanation about cost basis reset on transfer was super clear too. Ended up doing a mix of cash and in-kind transfers based on their recommendations. Definitely worth checking out if you're dealing with education accounts.

For anyone still stuck on hold with the IRS trying to get clarification on Coverdell distributions (like I was for HOURS), I finally found a service called Claimyr that got me through to an actual IRS agent in about 15 minutes. Their website is https://claimyr.com and they have a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. They basically navigate the IRS phone tree for you and call you back when they've got an agent on the line. The IRS agent confirmed everything about the cost basis reset on transfer and gave me some additional tips about documentation I needed to keep for the distribution.

Ok I'm honestly shocked. After posting my skeptical comment yesterday, I decided to just try the Claimyr thing since I was desperate. It actually worked! Got through to an IRS agent who specialized in education accounts within about 20 minutes. The agent confirmed everything about the cost basis reset on Coverdell transfers and gave me some extra tips about keeping documentation of the qualified expenses. They said to keep proof that I paid the expenses from my personal account within the same tax year as the distribution. Saved me hours of frustration and now I feel confident about doing the in-kind transfer of shares. Going with that option since it seems cleaner than selling and rebuying.

Just want to add - don't forget about the time limits for Coverdell ESA distributions. You need to take the distribution in the same tax year that you pay the qualified education expenses. Since you already paid the tuition from your brokerage, make sure you do the distribution before December 31st if the expenses were paid this year!

Has anyone calculated whether there's actually any market risk in selling and rebuying vs doing the in-kind transfer? I keep hearing that time out of market is a concern but for a same-day sale and purchase, how much could prices really change?

Great question about the market risk! I actually went through this exact calculation when I did my son's Coverdell distribution last spring. For individual stocks, the risk can be pretty significant even intraday - especially if you're dealing with volatile securities. But even with stable dividend stocks, I found the bid-ask spread alone could cost me 0.1-0.3% on each transaction (sell + buy = double hit). The bigger issue I ran into was timing - even though I planned to sell and rebuy the same day, my Coverdell custodian took 2 business days to process the distribution request, and then another day for the cash to settle in my brokerage account. So I was actually out of the market for 3 days, during which one of my holdings went up 4%. The in-kind transfer took the same 2-3 days to process, but the shares were never actually sold, so there was zero market risk. That sealed the deal for me - the operational simplicity plus eliminating any market timing risk made the in-kind transfer the clear winner. Just make sure your custodian supports in-kind transfers for the specific securities you hold. Some have restrictions on certain types of investments.