Paid-in capital does not have an effect on stock basis. The two values are related -- the amount that a company lists as paid-in capital is almost identical to the buyer’s basis -- but the terms apply to two different values for two different parties. The company selling stock records the sale as paid-in capital, while the buyer uses the sale price as his basis for taxes.
Companies can sell shares of stock directly to investors, even though most stock circulates on secondary markets. When a company sells its shares, it records the value of the sale in two lines on the balance sheet: par value and paid-in capital. Par value is the minimum amount that a company can sell shares for, which is always under $1 and sometimes as small as a fraction of a cent per share.
Company accountants subtract par value from the sale price and list it in a line on the balance sheet. Accountants record the rest of the money from the sale in the “Paid-In Capital” line on the balance sheet. Paid-in capital appears under par value in the “Shareholders’ Equity” section of the balance sheet.
When an investor buys stock, the sale price plus any costs from buying, such as brokerage fees or transfer agent fees, form the stock’s cost basis. The buyer uses basis to figure the taxes he owes when he sells the stock. The IRS taxes any profits from selling stock, which investors calculate as sale price minus basis.
As two terms referring to the separate records of a seller and a buyer, paid-in capital and stock cost basis do not affect each other. The two terms refer to similar values, as both reference the sale price that the buyer and seller agreed upon. However, paid-in capital is less than the sale price because it does not include par value, and basis is usually more than the sales price because it includes any other costs involved in the sale.
Calla Hummel is a doctoral student studying contraband in international political economy. She supplements her student stipend by writing about personal finance and working as a consultant, as well as hoping that her investments will pan out.