Glossary
Cost Basis
The original value of an investment for tax purposes, usually the purchase price plus fees, used to compute gains and losses.
Cost basis is what an investment counts as having cost you for US tax purposes. When you sell, your Capital gain or Capital loss is the sale proceeds minus that basis, so getting the basis right decides how much tax you owe. For a simple stock purchase it is the price you paid plus any commission or fees.
Adjustments that change it
The starting basis gets adjusted over time:
- Reinvested dividends buy new shares, each with its own basis. Forgetting them makes you pay tax twice on the same money.
- Stock splits spread the same total basis across more shares.
- Wash sales add a disallowed loss to the basis of the replacement shares.
- Inherited shares generally take a "stepped-up" basis equal to their value on the date of death.
- Return-of-capital distributions lower the basis.
Lots and reporting
Each purchase is a separate tax lot. Brokers default to a method, often first-in, first-out, but most let you pick specific lots before the trade settles. Since 2011 US brokers must track basis for most stock bought in your account and report it to the IRS on Form 1099-B, but shares transferred in from older accounts may show "basis unknown", and the job of supplying it then falls to you.