Basis

AAA

DEFINITION of 'Basis'

1. The variation between the spot price of a deliverable commodity and the relative price of the futures contract for the same actual that has the shortest duration until maturity.

2. A security's basis is the purchase price after commissions or other expenses. Also known as "cost basis" or "tax basis".

3. In the context of IRAs, basis is the after-tax balance in the IRA, which originates from nondeductible IRA contributions and rollover of after-tax amounts. Earnings on these amounts are tax-deferred, similar to earnings on deductible contributions and rollover of pretax amounts.

INVESTOPEDIA EXPLAINS 'Basis'

1. As there are gaps between spot and relative price until expiry of the nearest contract, the basis is not necessarily accurate. In addition to the deviations created because of the time gap between expiry of the futures contract and the spot commodity, product quality, location of delivery, and the actuals may also vary. In general, the basis is used by investors to gauge the profitability of delivery of cash or the actual, and they also use it to search for arbitrage opportunities.

2. This figure is used to calculate capital gains or losses when a security is eventually sold.

3. Distributions of amounts representing basis in an IRA are tax-free. However, in order to ensure that this tax-free treatment is realized, the taxpayer must file IRS Form 8606 for any year that basis is added to the IRA and for any year that distributions are made from any of the individual's Traditional, SEP and/or SIMPLE IRAs. Failure to file Form 8606 may result in double taxation of these amounts and an IRS-assessed penalty of $50.

RELATED TERMS
  1. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  2. Basis Grade

    The minimum accepted standard that a deliverable commodity must ...
  3. Cost Basis

    1. The original value of an asset for tax purposes (usually the ...
  4. Basis Risk

    The risk that offsetting investments in a hedging strategy will ...
  5. Individual Retirement Account - ...

    An investing tool used by individuals to earn and earmark funds ...
  6. Narrow Basis

    A condition found in futures markets in which the spot price ...
Related Articles
  1. Taxes

    Tax-Saving Advice For IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  2. Options & Futures

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  3. Active Trading Fundamentals

    Get Positive Results With Negative Basis Trades

    Capitalize on the difference in spreads between markets with this popular strategy.
  4. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  5. You need to be patient, diligent and perseverant to be successful at investing, but more importantly, you need to start early.
    Investing Basics

    Why You Should Start Investing Early?

    You need to be patient, diligent and perseverant to be successful at investing, but more importantly, you need to start early.
  6. Chart Advisor

    Cocoa Prices Setting Up For A Move Lower

    Cocoa prices have been trending lower over the past several months and the recent bearish crossover between the 50-day and 200-day moving averages suggest that the long-term downtrend is gaining ...
  7. Options & Futures

    What are the differences between divergence and convergence?

    Find out what technical analysts mean when they talk about a market experiencing divergence or convergence and how they affect trading strategies.
  8. Many of us fantasize about winning a big lottery jackpot. Let’s say that actually happened? What would you do with the money? How would you manage it?
    Professionals

    Tips For Managing A Cash Windfall

    Many of us fantasize about winning a big lottery jackpot. Let’s say that actually happened? What would you do with the money? How would you manage it?
  9. Retirement

    Planning Ahead for 2015's Tax Law Changes

    Increased 401(k) limits can help savers put away more money for retirement in 2015—but some new restrictions are coming for IRAs.
  10. Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.
    Professionals

    Tips For Managing Inflation In Retirement

    Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center