costbasis

Cost basis, or tax basis, is the original value of an asset for tax purposes. It is used to determine capital gains or losses when the asset is sold and is adjusted for events that affect value, such as stock splits, reinvested dividends, return of capital, or improvements to property.

For most investments, basis starts with the purchase price and includes commissions and other acquisition costs. Real estate basis includes the purchase price plus substantial improvements and certain adjustments; for rental or business property, depreciation can reduce the basis over time.

Special rules apply for gifts and inheritances. Gifted property generally carries over the donor’s basis for measuring gain, with adjustments for loss calculations in some cases. Inherited property typically receives a stepped-up basis to the fair market value at the decedent’s date of death, which can reduce or eliminate taxes on appreciation that occurred before death.

Methods to track basis for securities include specific identification (selecting the particular shares sold), first-in, first-out (FIFO), and, for some fund shares, average cost. Investors may designate the method at purchase or sale, and brokers may apply a default method if none is specified.

Tax reporting and implications: cost basis is used to compute capital gains or losses on tax returns, with long-term gains typically taxed at lower rates than short-term gains. Brokers report basis to tax authorities on Form 1099-B, and taxpayers must ensure accuracy, especially when wash sale rules or complex events affect basis. Keeping thorough records helps ensure correct tax treatment.