Simple definition
Cost basis is the original amount you paid for an investment, including fees, used to figure your taxable gain or loss when you sell. Think of it as the receipt price you measure against: sell above it and you have a gain, sell below it and you have a loss. It can change over time with reinvested dividends, stock splits, or improvements. Knowing it keeps you from overpaying taxes.
Why it matters
Your taxable gain is the sale price minus your cost basis, so an accurate basis directly affects your tax bill. Overstating income by forgetting reinvested dividends means paying tax you don't owe. Good records — or your broker's tracking — can save you real money at tax time.
Real-life example
Say you buy 100 shares at $20 each, paying $2,000 plus a $10 fee, for a $2,010 cost basis. You later sell them for $3,000. Your taxable gain is $3,000 minus $2,010, or $990 — not the full $3,000 you received.
Formula
Capital gain or loss = sale price − cost basis
Common mistakes
- Forgetting to add reinvested dividends to your basis, which overstates your taxable gain.
- Losing purchase records for old shares, making the basis hard to prove.
- Ignoring how a stock split changes your per-share basis, throwing off the math.
- Assuming inherited assets keep the original basis when they often get a step-up.
Pro tips
- Keep or download brokerage statements showing what you paid and any reinvestments.
- Let your broker track basis, but verify it before relying on the 1099 at tax time.
- Add reinvested dividends to your basis so you don't pay tax twice on them.
- Consider which shares to sell — specific lots can shrink your taxable gain.
Related Money Dictionary terms
- Capital GainThe profit you make when you sell an investment for more than you paid for it.
- Capital LossThe loss you take when you sell an investment for less than you paid for it.
- Capital Gains TaxThe tax you owe on the profit from selling an investment for more than you paid.
- Tax-Loss HarvestingSelling investments at a loss on purpose to offset taxable gains and lower your tax bill for the year.
- Wash SaleSelling an investment at a loss and rebuying it within 30 days, which cancels the tax benefit of that loss.
- Taxable AccountA standard investment account with no special tax breaks, where gains and dividends are taxed each year.
Frequently asked questions
How do I find my cost basis?
Brokerages are generally required to track and report cost basis for investments bought in recent years, shown on your Form 1099-B. For older holdings, check your own purchase records or old statements. If you can't find it, the IRS may treat your basis as zero, so keep good documentation.
What is a step-up in basis?
When you inherit an asset, its cost basis is often reset to its market value on the date the original owner died — a 'step-up.' This can erase much of the taxable gain if you sell soon after. It's a valuable rule for heirs, though details vary, so confirm with a tax professional.
Do reinvested dividends change my basis?
Yes. Each time a dividend is reinvested to buy more shares, that reinvested amount adds to your total cost basis. Forgetting this is a common error that makes your gain look bigger and your tax bill higher than it should be. Track reinvestments so you don't pay tax on the same money twice.
Knowing what Cost Basis means is knowledge — the first half. A brick gets placed when you act on it: download a brokerage statement and confirm the cost basis listed for one holding.
Also builds: Investing
Sources & references
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Plain-English education — not personalized legal, tax, or investment advice.