Cost basis

What cost basis means

Cost basis is the original value you paid for an asset. It is the starting point used to figure out your taxable gain or loss when you sell that asset. If you sell for more than your cost basis, you usually have a capital gain. If you sell for less, you usually have a capital loss.

Cost basis applies to stocks, bonds, mutual funds, real estate, business property, and other investments.

Why cost basis matters

Taxes are based on gains or losses. If you do not know your cost basis, you cannot compute your gain. The IRS needs this number when you report sales on your tax return. A wrong cost basis can mean paying too much tax or getting audited.

Basic formula

Gain or loss = Sale price - Cost basis - Selling expenses

Example:

• Buy 100 shares at $10 each. Cost basis = 100 × $10 = $1,000.
• Sell those shares at $15 each. Sale price = 100 × $15 = $1,500.
• Capital gain = $1,500 - $1,000 = $500.

If you had a $50 broker fee when selling, subtract that: Gain = $1,500 - $1,000 - $50 = $450.

Adjusted basis

Your cost basis can change after you buy an asset. This is called adjusted basis. Common adjustments include:

• Adding the cost of improvements for real estate.
• Adding commissions or fees paid to buy the asset.
• Subtracting depreciation taken for business or rental property.
• Adding back disallowed losses from wash sale rules.

Example for real estate:

• Buy a house for $200,000. You spend $10,000 on a new roof. Adjusted basis = $210,000.

Types of basis situations

Original purchase

• The simplest case. Basis equals what you paid plus fees.

Inherited property

• Basis usually "steps up" to the market value at the date of the decedent's death. That often reduces taxable gains when you sell.
• Example: Parent bought stock for $1,000. At death the stock is worth $5,000. Your basis becomes $5,000.

Gifts

• Basis usually carries over from the donor. You take the donor's original basis.
• If donor paid $1,000 and gave it to you when it was worth $3,000, your basis is $1,000 for calculating gain.
• Special rules apply to determine basis for losses.

Stock splits and dividends

• Stock splits change the number of shares and the per-share basis. A 2-for-1 split halves the per-share basis.
• Reinvested dividends increase your basis because you used dividends to buy more shares.

Methods for matching shares

When you sell part of a holding you must decide which shares you sold. Common methods:

• FIFO (first in, first out): The oldest shares are sold first. This is the default for many brokers.
• Specific identification: You tell your broker which exact shares you sold. This lets you choose shares with a higher or lower basis to manage taxes.
• Average cost: Used mainly for mutual funds and ETFs. Basis is the average price of all shares you own.

Specific identification gives you the most control. You must document which shares you sold.

Wash sale rule

If you sell a stock at a loss and buy the same or a substantially identical stock within 30 days before or after the sale, the loss is disallowed. Instead the disallowed loss is added to the basis of the new shares. That raises the basis and defers the loss until you sell the replacement shares.

How to find your cost basis

• Broker statements and trade confirmations. These are the primary sources.
• Brokerage cost basis reports for taxable accounts will often show basis and gains.
• Keep records: purchase dates, purchase price, commissions, reinvested dividends, and improvements.
• If records are missing, you may need to use reasonable estimates or contact the broker for historical data.

Reporting and taxes

• Brokers report sales on Form 1099-B. For covered securities, they will provide basis information to you and the IRS.
• You report capital gains and losses on Schedule D and Form 8949 with your tax return.
• Short-term gains (assets held one year or less) are taxed at ordinary income rates. Long-term gains (more than one year) often get lower tax rates.

Common mistakes to avoid

• Not including purchase fees or commissions in basis.
• Forgetting to add improvements to real estate basis.
• Ignoring reinvested dividends in mutual funds.
• Using default FIFO when specific identification would lower taxes.
• Not tracking wash sales when trading frequently.

Quick checklist

• Save trade confirmations and broker statements.
• Add buying fees and improvements to your basis.
• Choose the right share identification method when selling.
• Watch the 30-day window for wash sales.
• Use your broker's cost basis report when available.
• Report sales accurately on Form 8949 and Schedule D.

Knowing your cost basis is the basic step to handling investment taxes correctly. Keep simple records and check your broker's reports. That will save time and money when you sell.