Cost Basis

Cost basis is what you paid for an investment, including any fees or commissions. It's essential for calculating taxes when you sell.

Basic Formula: Capital Gain/Loss = Sale Price

• Cost Basis

Example:

• Buy 100 shares at $50/share = $5,000 cost basis
• Sell at $70/share = $7,000
• Capital gain: $7,000 - $5,000 = $2,000 taxable gain

Adjusted Cost Basis: Sometimes your cost basis changes:

1. Dividends Reinvested (DRIP): Each reinvested dividend increases your basis

• Original purchase: $5,000
• Dividends reinvested: $1,000
• Adjusted basis: $6,000

2. Stock Splits:

• Buy 100 shares at $100 = $10,000 basis
• 2-for-1 split → now own 200 shares
• New basis: $50/share (total still $10,000)

3. Return of Capital: Some dividends reduce your basis instead of being taxable

Cost Basis Methods:

1. FIFO (First In, First Out): Default method—oldest shares sold first

2. Specific Identification: You choose which shares to sell (highest basis = lowest gain)

3. Average Cost: Only for mutual funds—average price of all shares

Example of Specific ID Benefit: You bought Apple in three batches:

• 2020: 10 shares at $100 = $1,000 basis
• 2022: 10 shares at $150 = $1,500 basis
• 2024: 10 shares at $200 = $2,000 basis

Sell 10 shares at $250:

• FIFO (default): $250 - $100 = $150/share gain = $1,500 taxable
• Specific ID (sell 2024 batch): $250 - $200 = $50/share gain = $500 taxable
• Tax savings: $150-$225 depending on bracket

Inherited Assets: Get "step-up in basis" to market value at date of death—huge tax benefit.

Tracking: Brokers track cost basis automatically (since 2011). Always keep records for inherited/transferred assets.