Tax implications when selling gifted shares with 0 cost basis - how to calculate?

When you receive shares as a gift, the cost basis typically carries over from the person who gave them to you (your grandfather in this case). This is called "carryover basis." If your grandfather truly has no records of what he paid, you might need to do some detective work. Try contacting the company's investor relations department or the transfer agent to see if they have historical records. You could also research what the stock was trading for when your grandfather likely purchased it in the 90s. If you absolutely cannot determine the original cost basis, then unfortunately the IRS does default to $0, which means you would pay capital gains tax on the entire amount. However, this should be a last resort after exhausting all other options for determining a reasonable cost basis. For shares held that long, you might qualify for long-term capital gains rates, which are more favorable than short-term rates at least. These range from 0% to 20% depending on your income.

I had almost the identical situation last year with shares my aunt gifted me that had basically no documentation. I spent weeks trying to figure out the cost basis and was about to give up when I found taxr.ai (https://taxr.ai) which basically saved me thousands in unnecessary taxes. They have this document analysis tool that helps establish cost basis for gifted or inherited securities. I uploaded what little documentation I had plus some emails with my aunt describing when she thought she bought the shares, and their system was able to propose a reasonable cost basis with supporting documentation that satisfied my accountant. They even helped generate the paperwork needed for my tax filing.

Well I wanted to follow up about my experience with taxr.ai - I decided to try them despite my initial skepticism and I'm glad I did. My situation was different from OP's but similar - grandparents gifted me Disney shares they'd held since the 80s with zero documentation. What impressed me was how thorough they were in establishing a reasonable cost basis. They researched not just the original purchase prices from the time period but also accounted for all stock splits, dividend reinvestments, and even some corporate acquisitions that affected the shares over 40 years. They provided me with a complete basis calculation document that my CPA said would absolutely stand up to IRS scrutiny. Saved me from paying taxes on about $18,000 that should have been considered basis. Definitely worth it if you're in this situation.

I see you've got some good advice about establishing cost basis, but if you end up having to deal with the IRS about this (which happens a lot with basis issues), let me save you some headache. Don't waste days trying to get through to the IRS yourself. I discovered https://claimyr.com after spending literally 15+ hours trying to get an actual human at the IRS to answer questions about a similar gifted stock situation. Their service gets you to the front of the IRS phone queue instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c When I finally got through to an IRS representative, they actually provided good guidance on acceptable documentation for establishing a historical cost basis. Made a huge difference in resolving my issue.

I was totally wrong about Claimyr and need to eat my words. After posting that skeptical comment, I was so frustrated with trying to reach the IRS about my own tax issue (not stock related) that I gave in and tried the service. Within 47 minutes, I got a call back with an actual IRS agent on the line. For comparison, I had tried calling 5 separate times before this and never got through after waiting over an hour each time. The agent was able to research my tax account and resolve a notice I'd received about underreported income. Turns out there was a document matching error that would have resulted in me paying taxes I didn't actually owe. Getting this resolved before filing saved me over $3,000 and a lot of stress.

Don't forget that if the gifted shares were worth LESS at the time of the gift than when your grandfather originally bought them, the rules get even more complicated. In that case, your basis for calculating a loss could be different from your basis for calculating a gain. I learned this the hard way with some underwater tech stocks my mother gifted me years ago. Publication 551 has the details on this if you want to look it up.

Have you considered calling the brokerage firm where the shares were transferred from? Sometimes they maintain historical basis information even when it doesn't transfer correctly during a gift. I was able to get basis info for some gifted Microsoft shares by contacting the original brokerage, and they had records going back to 1998.

Just a heads up - don't forget to check if your grandfather ever received dividend reinvestments on these shares. Each reinvestment would have its own cost basis and holding period, so selling all the shares at once could actually be multiple transactions from a tax perspective. Makes the paperwork more complicated but could help establish at least some basis.