Considerations
If you have no idea or cannot document when you purchased, or how much you paid for a security, the IRS requires you to use a cost basis of $0. Nevertheless, you should try to get some information about the position in question. You can try contacting your broker or dig through your old monthly and year-end statements. Using this information, try to pinpoint a time period (no matter how big) when you can estimate your cost basis. The IRS accepts accurate estimates as long as you can document how you arrived at your conclusion.
Example of how you can estimate cost basis:
A security shows up on your April 30, 2003 account statement. Look to see if the position appears on your prior March 31, 2003 statement. If not, it is fairly safe to assume that you acquired the position in April, 2003. Find the lowest price at which the security traded during the month of April, 2003 (your broker may be able to help you), and use this price to calculate your original cost basis. Do not add a commission to this cost basis unless you can prove you paid one; and check stock listings to figure whether the shares split after that date. This conservative approach will maximize your gain (and your tax obligation), which should appease the IRS. While maximizing your gain may not excite you, this method is certainly better than having to declare a $0 cost basis.
Note: If you can determine that you purchased the security at some point during a given year, try to narrow it down to a specific month. If you can determine that you purchased the security at some point during a given month, try to narrow it down to a specific week. Each time you narrow the timeframe, the more accurate your estimated cost becomes. This will satisfy IRS requirements and it benefits you since your cost basis is likely to be close to what you actually paid for the security.
Tax Point:
Lowered tax rates help ease tax anxiety when low-basis assets are sold. Lower tax rates on capital gains means that you can diversify the family portfolio by selling highly appreciated assets without the usual big capital gains tax bite. Deciding whether to make a gift to a child during the parent's lifetime or whether the asset should transfer to the child at the parent's death may be less troublesome now that the capital gains rate has taken a dip.
Remember inherited assets get a set-up in basis to date-of-death fair market value. But step-up basis is scheduled to go away in 2010. Gifted assets, on the other hand, keep the giver's basis, but with a lower capital gains tax.