Cost basis.
In plain English
Cost basis is the amount you paid for an investment, including any commissions or fees. When you sell, the IRS uses the difference between your sale price and your cost basis to calculate your taxable gain or loss. For investments held in a taxable brokerage account, the broker tracks cost basis for you. For inherited assets, cost basis usually resets to fair market value on the date of death (the 'step-up in basis'), which can wipe out decades of unrealized gains for tax purposes.
01Why it matters
Cost basis is the single most common reason taxes turn out higher or lower than expected at sale. Bad recordkeeping (especially for older accounts or transferred-in shares) can lead to overpaying tax. Choosing which lots to sell (specific identification vs. FIFO) can lower a tax bill substantially when you have multiple purchase dates.
02The math, step by step
You bought 100 shares of an index fund at $50 ($5,000 cost basis), reinvested dividends growing the position to 105 shares with an adjusted basis of $5,200, then sold all at $80 per share ($8,400 proceeds). Taxable gain: $8,400 minus $5,200 = $3,200, taxed at long-term capital gains rates if held over a year.
03What this is NOT
Cost basis is what you paid; current price is what it is worth now. The difference, once realized by selling, is your gain or loss.
04Receipts
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