Cost basis is the tax starting value of an investment or other asset.
What it means
Basis often starts with what you paid, but it can change. Reinvested dividends, improvements to property, stock splits, gifts, inheritances, and wash sales can all affect it.
When an asset is sold, the sale amount is compared with adjusted basis to help find the taxable gain or loss.
A simple example
You buy shares for $20,000. Over time, you reinvest $2,000 of dividends to buy more shares. Those reinvested dividends may raise the adjusted cost basis to $22,000 because you already paid tax on that income in a regular account.
Later, you sell everything for $32,000. Using a $20,000 basis would show a $12,000 gain. Using the adjusted $22,000 basis shows a $10,000 gain before other tax details. Good records can keep you from paying tax twice on the same money.
What people often miss
A missing or wrong basis can make the tax bill wrong. Old records can matter many years later.
The basis shown by a broker may not include facts the broker does not know.
Three questions worth asking
- Where did this basis number come from?
- Were dividends or other changes added?
- Do I have records to support it?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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