What is Cost Basis?
The cost basis is the original amount paid for a given asset. Along with the basic purchase price, a cost basis will also account for any commissions or fees that were also incurred by the buyer as part of the process to complete the purchase. Knowing this figure is helpful in determining the amount of gains or losses that are made with the holding upon completion of the purchase. It is important to note that the cost basis is focused on how much the holder of the asset had to pay in order to complete the acquisition, not the actual value of the asset itself. For example, it is possible for an investor to purchase a piece of real estate for more than the current appraised value of the home. This may occur because the investor has some reason to believe the property will eventually appreciate in value above the total acquisition cost, making the capital loss a short-term issue. The same is true with stock offerings. An investor may become aware of stocks that are currently performing be
Before you determine your profit or loss, you need to know your original cost basis. Your profit or loss depends on the difference between your cost basis and the price at which you sold your investment. In the normal scheme of things, your cost basis is your original purchase price, but sometimes you can make adjustments to that figure to make it larger. Other times, you need to do a little calculating or even some sleuthing to figure out the correct basis to use. For instance, calculating basis may be more complicated if you’ve been buying shares in an individual stock or a mutual fund at different prices over time, such as through a dividend reinvestment program (DRIP). Calculating basis can also be complicated if your stock has split. Your basis may also be affected if the company or fund you’ve invested in has merged with another. And the rules are different if you’re not the person who originally bought the investment — for example, if you received it as a gift, in a settlement,
