Cost Basis
The original value of an asset for tax purposes, used to calculate capital gain or loss upon sale.
What is Cost Basis?
Cost basis is the original purchase price of an asset, adjusted for certain events, that is used to determine the taxable capital gain or loss when the asset is sold. Capital gain (or loss) equals the sale proceeds minus the cost basis. For stocks and funds, basis is typically the purchase price plus commissions. Basis is adjusted upward by reinvested dividends and downward by return-of-capital distributions. For inherited assets, a 'step-up in basis' to the fair market value at death resets the basis. For gifted assets, the recipient generally takes the donor's original basis. Accurate basis tracking is essential for tax reporting, and brokers are required to report it to the IRS for most securities purchased after 2011.
Example
An investor buys 100 shares of Apple at $150/share (cost basis = $15,000) and sells them years later at $200/share (proceeds = $20,000). The capital gain is $5,000. If instead they had received the shares as an inheritance when Apple was worth $180/share, the stepped-up basis is $18,000 and the gain is only $2,000.