Basis (Cost Basis) refers to the original value of an asset for tax purposes, usually the purchase price plus any additional costs incurred to acquire the asset, such as commissions and fees. It serves as a crucial figure in determining capital gains or losses when the asset is sold.
In more detail, the cost basis is used to calculate the taxable gain or loss on an investment. When an asset is sold, the selling price is compared to the cost basis. If the selling price exceeds the cost basis, a capital gain is realized; if it is less, a capital loss occurs.
For example, if an investor purchases 100 shares of a stock for $10 per share and pays a commission of $50, the cost basis for those shares would be $1,050 (100 shares x $10 + $50). If the investor later sells the shares for $15 per share, the total selling price would be $1,500, resulting in a capital gain of $450 ($1,500 – $1,050).
« Back to Glossary Index