Cost basis
Also known as: tax basis, basis
Cost basis is the original value of an investment for tax purposes, typically the purchase price plus commissions. It is subtracted from the sale proceeds to determine the capital gain or loss when the investment is sold.
Cost basis is an investor's total investment in a security for tax purposes. It starts with the purchase price plus any commissions or transaction fees, and it is the number subtracted from sale proceeds to calculate a capital gain or loss. Buy 100 shares at $50 with a $20 commission and your basis is $5,020; sell later for $6,000 and your taxable gain is $980.
Basis is not always static — it gets adjusted over time. Stock splits and stock dividends spread the same total basis over more shares, lowering the per-share basis. Reinvested dividends add to basis because they were already taxed as income. A return of capital distribution reduces basis. Selling at a loss and buying substantially identical shares within 30 days before or after that sale triggers the wash sale rule, which disallows the loss and adds it to the basis of the replacement shares.
How a security was acquired also matters. Inherited securities receive a stepped-up basis equal to the fair market value at the owner's death, while gifted securities generally carry over the donor's original basis. Options adjust basis too: the premium paid for a call is added to the stock's basis if the call is exercised, and a put writer's basis in stock acquired through assignment is the strike price minus the premium received.
Cost basis calculations appear throughout the Series 7, Series 6, and Series 66 exams. Expect questions on wash sales, basis adjustments from splits and reinvested dividends, inherited versus gifted basis, and how option premiums fold into the basis of exercised positions.
Key takeaways
- Cost basis equals the purchase price plus commissions and is subtracted from sale proceeds to compute capital gains or losses.
- Stock splits lower per-share basis, reinvested dividends increase total basis, and returns of capital reduce it.
- Inherited securities get a stepped-up basis to fair market value at death, while gifts generally carry over the donor's basis.
- Wash sales disallow a loss and add the disallowed amount to the basis of the replacement shares.
- The Series 7, Series 6, and Series 66 exams test basis adjustments, wash sales, and option-related basis calculations.