Cost Basis is the original value or purchase price of an asset or investment for tax purposes. It is used to calculate capital gains or losses when the asset is sold. The cost basis includes the purchase price of the asset plus any additional costs associated with acquiring the asset, such as commissions, fees, or improvements.

Key Points about Cost Basis:

1. Initial Purchase Price:
   • The cost basis starts with the amount you paid for the asset. For stocks, this would be the price per share multiplied by the number of shares, plus any commissions or fees paid to purchase the stock.
2. Adjustments to Cost Basis:
   • Dividends: If dividends are reinvested, the cost basis may be adjusted to include these reinvested amounts.
   • Stock Splits: If the company undergoes a stock split, the cost basis per share will be adjusted accordingly, although the total cost basis remains the same.
   • Improvements: For real estate, the cost basis includes the original purchase price plus the cost of improvements, such as renovations or additions, that increase the property’s value.
3. Inherited and Gifted Assets:
   • The cost basis of inherited assets is typically “stepped up” to the fair market value of the asset at the time of the original owner’s death.
   • For gifted assets, the cost basis is generally the same as the donor’s original cost basis, but there are exceptions depending on the fair market value at the time of the gift and whether the asset appreciated or depreciated.
4. Calculating Capital Gains or Losses:
   • When you sell an asset, your capital gain or loss is calculated as the difference between the sale price and the cost basis. If the sale price is higher than the cost basis, you have a capital gain. If it’s lower, you have a capital loss.

Example:

• If you bought a stock for \$1,000 and paid a \$10 commission fee, your cost basis would be \$1,010. If you later sell the stock for \$1,500, your capital gain would be \$490 (\$1,500 sale price – \$1,010 cost basis).

Importance of Cost Basis:

• Accurately determining the cost basis is essential for correctly calculating the amount of capital gains tax owed. Errors in cost basis can lead to either overpayment or underpayment of taxes, which could result in penalties or loss of money.

Record Keeping:

• Keeping detailed records of the purchase price, associated costs, and any adjustments is crucial for determining the correct cost basis when you sell an asset.

For more information, you can consult resources like the IRS.