Cost Basis

AAA

DEFINITION of 'Cost Basis'

1. The original value of an asset for tax purposes (usually the purchase price), adjusted for stock splits, dividends and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset's cost basis and the current market value. Also known as "tax basis".

2. The difference between the cash price and the futures price of a given commodity.

INVESTOPEDIA EXPLAINS 'Cost Basis'

1. Using the correct tax basis is important especially if you reinvested dividends and capital gains distributions instead of taking the earnings in cash. Reinvesting distributions increases the tax basis of your investment, which you must account for in order to report a lower capital gain (and therefore pay less tax). If you don't use the higher tax basis, you could end up paying taxes twice on the reinvested distributions.

For example, say you bought 100 shares of a stock for $1,000 last year and you reinvested the $100 of dividends distributed from the company. The next year, you received $200 in dividends and capital-gains distributions, which you again reinvested. Since tax law considers these reinvested earnings as paid to you even though you didn't actually have the cash in hand, your adjusted cost basis when the stock is sold should be recorded at $1,300 instead of the original purchase price of $1,000. Thus, if the sale price is $1,500, the taxable gain would only be $200 ($1,500 - $1,300) instead of $500 ($1,500 - $1,000). If you record the cost basis as $1,000, you'll end up paying more taxes than you have to.

2. For example, if particular corn futures contract happens to be trading at $3.50, while the current market price of the commodity today is $3.10, there is said to be a $0.40 basis.

VIDEO

RELATED TERMS
  1. Stock Split

    A corporate action in which a company divides its existing shares ...
  2. Amortizable Bond Premium

    A tax term referring to the excess premium paid over and above ...
  3. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  4. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  5. Basis

    1. The variation between the spot price of a deliverable commodity ...
  6. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
Related Articles
  1. Fundamental Analysis

    What are the main methods for calculating business costs?

    See why different economic actors use different methods for calculating costs, and learn how different methods can impact the taxes that actors pay.
  2. Bonds & Fixed Income

    Know Your Cost Basis For Bonds

    Nobody likes taxes, but tax reporting is an inevitable and unavoidable part of investing. If you buy stock, determining your costs basis is a slightly frustrating but fairly straightforward exercise. ...
  3. Investing Basics

    What Determines Your Cost Basis?

    In any transaction between a buyer and seller, the initial price paid in an exchange for a product or service will qualify as the cost basis. When it comes to securities and related financial ...
  4. Investing Basics

    Know Your Stock Cost Basis

    Understanding equity cost basis is critical for tracking the gains or losses of an investment.
  5. Taxes

    Using Tax Lots: A Way To Minimize Taxes

    The method of identifying cost basis can help you to get the most out of reduced tax rates.
  6. Retirement

    Don't Lose Your Shirt On Mutual Fund Sales

    Mutual funds aren't guaranteed profit-makers, but with the right calculations and timing, you can avoid major losses.
  7. Investing

    How do I figure out my cost basis on a stock investment?

    The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. It is used to calculate the capital gain or loss on an investment ...
  8. Options & Futures

    How do you calculate the cost basis for a mutual fund over an extended time period?

    Investors must pay taxes on any investment gains they realize. Subsequently, any capital gain realized by an investor over the course of a year must be identified when they file their income ...
  9. Retirement

    How do I calculate my gains and/or losses when I sell a stock?

    To begin, you need to know your cost basis, or the price you paid for the stock. If you did not record this information, you should have an order execution confirmation and/or an account statement ...
  10. What's a Marketable Security?
    Active Trading

    What's a Marketable Security?

    Marketable securities are financial instruments that can be readily bought and sold in a public market. The key feature is the ease with which it can be sold and converted into cash. Usually, ...

You May Also Like

Hot Definitions
  1. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  3. Deferred Revenue

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

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

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

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
Trading Center