cost basis
The original value of an asset for tax purposes, typically the purchase price plus commissions, used to calculate capital gains or losses when the asset is sold.
Example
“His cost basis in the stock was $50 per share, so selling at $75 triggered a $25 per share capital gain.”
Memory Tip
Cost BASIS = the BASE (original) cost. The starting point for calculating your gain or loss.
Why It Matters
Understanding cost basis is crucial because it directly determines how much tax you owe when you sell an investment. The difference between your selling price and cost basis is your capital gain or loss, which affects your tax liability and can result in significant savings if tracked correctly.
Common Misconception
Many people believe that cost basis is simply what they paid for an asset, but it actually includes additional expenses like broker commissions, fees, and sometimes adjustments for stock splits or dividends. Ignoring these additions can lead to overpaying taxes on your investments.
In Practice
If you buy 100 shares of stock at 50 dollars per share and pay a 100 dollar commission, your cost basis is 5100 dollars total, or 51 dollars per share. When you sell all shares at 70 dollars per share for 7000 dollars, your capital gain is 1900 dollars, not 2000 dollars, saving you tax on that extra 100 dollars in profit.
Etymology
From Latin 'costa' (side, rib) + Greek 'basis' (step, base). The BASE cost of an asset.
Common Misspellings
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Related Terms
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See Also
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