Cost Basis

When an asset is sold, the taxable gain or loss is the sale proceeds minus the cost basis. A higher basis means a smaller gain and less tax.

For example, an investor buys 100 shares at 20 each and pays a commission of 10. Their cost basis is 2,010. If they later sell all the shares for 3,000, the gain is 990.

The basis can change over time. It may increase with reinvested dividends that were already taxed, or with improvements to property. It may decrease with depreciation claimed on property, or with certain returns of capital. For inherited assets, many countries reset the basis to the value at the date of death, sometimes called a step-up in basis in the United States.

Keeping good records of cost basis is important, especially for investments bought in several batches over many years. Brokers often track it, but the investor is usually responsible for reporting it correctly. Different methods of choosing which shares were sold can change the gain reported.

Note: Tax basis means the same as cost basis when used for an asset's value for tax purposes.