COST BASIS
Back to GlossaryDefinition
The original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions.
Summary
Cost basis is essentially what you originally paid for an investment, plus any adjustments over time. Think of it as your 'starting point' for calculating gains or losses when you sell. If you buy 100 shares of stock for $50 each, your initial cost basis is $5,000. However, this amount can change due to events like stock splits (where you get more shares but each is worth less) or dividends that get reinvested. Understanding cost basis is crucial because it determines how much tax you'll owe when you sell - you only pay taxes on the profit above your cost basis.
Usage Context
Essential when learning about taxation of investments, calculating capital gains and losses, portfolio management, and making informed selling decisions. Critical for tax planning and compliance.
Common Confusions
- Thinking cost basis is always just the purchase price (forgetting about adjustments)
- Confusing cost basis with current market value
- Not understanding how stock splits affect cost basis calculations
- Assuming all dividends adjust cost basis (only return of capital distributions do)
- Mixing up cost basis with the amount of gain or loss
