Cost basis

Also called tax basis

The original value of an asset for tax purposes, usually what was paid plus certain costs, used to figure the gain or loss when it is sold.

What it means

Cost basis is the starting point for measuring a taxable gain or loss. For a stock or fund it is usually the purchase price plus any commissions or fees, and reinvested dividends add to it because they were already taxed. For a home or rental, basis generally includes the purchase price, some closing costs and the cost of improvements, minus any depreciation claimed.

When shares of the same investment were bought at different times, the method chosen to identify which shares were sold, such as first in, first out or specific lots, changes the reported gain. Gifted assets usually keep the giver’s basis, while inherited assets generally get a new basis equal to their value at the owner’s death.

Formula

Capital gain or loss = Sale proceeds − Cost basis

Sale proceeds = amount received, net of selling costs
Cost basis = original cost plus adjustments

Example

Suppose someone buys 100 shares at $40 each, a $4,000 basis, and later reinvests $200 of dividends. Their basis becomes $4,200, so selling everything for $6,000 produces a $1,800 gain, not $2,000.

How it’s used

Reporting stock, fund or real estate sales
Choosing which shares to sell
Tracking home improvements for a future sale

Good to know

Brokers report basis for most recently bought securities, but older holdings, gifts and real estate often need personal records.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.