Definition
Cost basis determines the taxable gain or loss when an asset is sold. It includes the purchase price plus commissions and fees. For stocks, basis may be adjusted for dividends reinvested, stock splits, and return of capital. Multiple shares may have different bases. Methods for identifying which shares to sell include specific identification, FIFO (first in, first out), and average cost.
functions Formula
Capital Gain = Sale Price − Cost Basis
lightbulb Example
Bought 100 shares at $50 ($5,000 basis), later bought 100 more at $70 ($7,000 basis). Total basis: $12,000. Selling all 200 shares at $80 for $16,000: gain = $4,000. Using specific identification, selling only the $70-basis shares: gain = ($80-$70) × 100 = $1,000.
verified_user Key Points
- Original purchase price plus fees and adjustments
- Multiple lots may have different bases
- Specific identification, FIFO, average cost methods
- Step-up in basis at death (currently)