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Cost Basis

In short

What you paid for an investment — used to calculate taxable gains or losses

If you buy 10 shares at $100 each, your cost basis is $1,000. When you sell for $1,500, you're taxed on the $500 gain, not the full $1,500. The cost basis is your starting point for tax calculations.

Cost basis is the original value of an asset for tax purposes, adjusted for events like dividends, splits, and reinvestments. Methods: FIFO (first in, first out), LIFO, specific identification. Choosing the right method can reduce taxes when selling partial positions.

Formula

Capital Gain = Sale Price - Cost Basis

Related concepts

  • Short-Term Capital Gains — If you buy a stock and sell it within a year for a profit, the IRS taxes that gain at your regular income tax rate (up to 37%). That's much higher than the 15-20% rate for stocks held longer than a year.
  • Long-Term Capital Gains — Hold a stock for more than a year before selling and you get a special lower tax rate — 0%, 15%, or 20% depending on your income. That's much better than paying your regular income tax rate on short-term gains.
  • Wash Sale Rule — If you sell a stock at a loss and buy it back within 30 days (before or after), the IRS disallows the loss. This prevents you from harvesting losses while staying invested. To avoid it, buy a similar but different stock.
  • Tax-Loss Harvesting — If you're up $10,000 on Apple but down $3,000 on another stock, you can sell the loser to offset $3,000 of your Apple gains. You only pay tax on $7,000 instead of $10,000. The IRS lets you use losses to cancel gains.