Cost Basis
The original purchase price of an asset (plus adjustments like commissions and reinvested dividends), used to calculate capital gain or loss when you sell.
Cost basis is the original value of an asset for tax purposes, typically the purchase price plus any associated costs like commissions, fees, and in some cases reinvested dividends or capital improvements. When you sell the asset, your capital gain or loss equals the sale price minus your cost basis.
For stocks and mutual funds, cost basis is usually straightforward — what you paid per share. But it can become complex with reinvested dividends, stock splits, mergers, or inherited assets. Inherited assets receive a "stepped-up" basis equal to the fair market value on the date of the decedent's death, which can eliminate decades of unrealized gains.
Brokerage firms are required to report cost basis to the IRS for stocks acquired after 2011 and mutual funds acquired after 2012. You can choose from several cost basis methods: specific identification (choosing which shares to sell), FIFO (first in, first out), or average cost (for mutual funds). The method you choose can significantly impact your tax bill when selling partial positions.
Related Terms
Capital Gains
The profit from selling a capital asset (stocks, real estate, etc.) for more than its purchase price. Capital gains are classified as short-term or long-term based on holding period.
Short-Term Capital Gains
Profits from selling assets held for one year or less, taxed at ordinary income tax rates (10% to 37%). There is no preferential rate for short-term gains.
Long-Term Capital Gains
Profits from selling assets held for more than one year, taxed at preferential rates of 0%, 15%, or 20% depending on your taxable income.
Wash Sale Rule
An IRS rule that disallows a capital loss deduction if you buy a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the new shares.
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