Cost Basis
What Is Cost Basis?
Cost basis is the original value of an asset for tax purposes, usually equal to the purchase price plus certain costs such as commissions or fees.
Cost basis is used to calculate capital gains or capital losses when an asset is sold.
Why It Matters
Understanding cost basis helps investors determine how much profit or loss they realized when selling an asset.
The difference between the sale price and the cost basis determines whether a gain or loss must be reported for tax purposes.
How Cost Basis Works
When an investment is purchased, the cost basis is recorded as the starting value.
When the asset is sold:
- selling price minus cost basis = capital gain or loss
Cost basis may be adjusted over time for events such as stock splits, reinvested dividends, or certain improvements.
Example
If an investor buys stock for $3,000 and later sells it for $4,500, the $1,500 difference represents a capital gain based on the original cost basis.
Cost Basis vs Adjusted Basis
- Cost basis is the original purchase value of an asset.
- Adjusted basis reflects changes to the cost basis due to improvements, depreciation, or other adjustments.
FAQs About Cost Basis
Does cost basis include fees or commissions?
Yes. Certain purchase costs may be included.
Why is cost basis important for taxes?
It determines the amount of taxable gain or deductible loss.
Do investment firms track cost basis?
Many brokerage firms report cost basis information to investors.
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