Definition
Cost basis is the amount used to measure gain or loss when an asset is sold, generally what you paid plus certain adjustments.
How It Works
Basis starts with the purchase price and is adjusted for items such as commissions, reinvested dividends, improvements on real estate, or depreciation taken. Gain or loss equals the sale price minus the adjusted basis.
Example
An investor's mutual fund basis includes reinvested dividends, which raises basis and reduces the taxable gain at sale.
Who It Applies To
Anyone who sells an asset.
Watch-Outs
Failing to track basis, especially reinvested dividends or real estate improvements, can lead to overpaying tax by overstating the gain. Inherited assets generally receive a stepped-up basis.
