What It Is:
Basis refers to the original price of an asset. It is sometimes called cost basis or tax basis.
How It Works/Example:
(100 x $5) + $10 = $510
Income realized from the , including dividends and capital distributions (even if they are reinvested rather than received in ) increase the basis. Thus, in the above example, if your stock paid a $1-per-share dividend every year for three years, your basis would increase to:
$510 + (100 x $1 x 3) = $810
depreciation on the is subtracted from the cost basis.spent on improvements to an (such as certain home improvements) are added to the 's basis, and
Why It Matters:
An sale price and the basis is called a capital gain (if the sale price is higher than the cost basis) or a capital loss (if the sale price is lower than the basis). Capital gains are generally only taxable when the investor actually sells the . Realized losses can often offset these gains and thus lower the investor's potential capital-gains . The length of time the is held, among other things, determines the tax effect of the gain or loss. Changes in tax rates also may influence an investor's concern about basis.'s basis becomes very important when the owner sells the . The difference between the
An step-up in basis).'s basis is usually based on its original purchase price, but sometimes people inherit rather than purchase them. In these cases, the basis of the becomes the value of the at the time the investor inherits it (this is called a
Often, investors accumulate inventory" were sold in order to calculate capital gains or losses. In general, investors want to minimize by selling the with the highest basis first. However, if the investor cannot identify which are which, the IRS requires use of the first-in-first-out ( ) method, meaning that the investor must assume he or she first sells the that are held the longest. These older may not have the highest basis of the investor's inventory of , and thus the method could inflate the investor's tax bill.of the same at different prices over time. Because of this, when the investor sells some of the , he or she must identify which from the "