Cost basis

Before you rely on it

What to check

Include reinvested dividends and capital improvements.

The common error

Where people go wrong with cost basis

Forgetting reinvested dividends. Each reinvestment was a purchase, each one raised basis, and leaving them out means paying tax a second time on income already taxed once when it was paid.

Worked through

Cost basis in plain numbers

You buy 100 shares at $40, paying a $10 commission. Your cost basis is $4,010. Later you buy another 100 at $60, with a $10 fee, for a basis of $6,010 on that lot. Now you sell 100 shares for $7,000, with a $10 fee. If you sold the first lot, the gain is $6,990 − $4,010 = $2,980. If you sold the second, the gain is $6,990 − $6,010 = $980. Same sale, very different taxable result. Which lot counts depends on the identification method you or your broker uses, so check it before the trade.

Easily confused

Cost basis and its neighbours

Cost basis is not the same as market value or purchase price alone. Market value is what an asset is worth now. Purchase price excludes fees and adjustments that usually belong in basis. Basis can go up with improvements, reinvested dividends or purchase costs and down with depreciation or return of capital. Adjusted basis is the figure after those changes. Inherited assets often receive a basis reset to value at the date of death under some rules, while gifts carry over the donor's basis; the word sounds simple, but it depends on how you got the asset.

In real decisions

Where cost basis turns up

Basis determines the gain or loss you report when you sell. Brokers track it for many accounts and send a form at year end; investors use it to plan sales, harvest losses and choose which lots to sell. Homeowners keep records of improvements to raise basis and reduce a future gain. Business owners track basis in assets for depreciation. Keeping good records at purchase saves difficulty years later, when statements may be hard to find.

Know the edges

Where cost basis stops being reliable

Rules differ by country, account type and asset. Not every broker tracks every adjustment, and older purchases may lack records. Wash-sale rules can adjust basis after a sale at a loss. Mutual fund reinvestments create many small lots. Estimates in a calculator use the numbers you enter, not the figures your broker reports. When the difference matters, use the official statement and consult a qualified tax professional.

Quick answers

What people ask about cost basis

What is the difference between FIFO and specific identification? FIFO sells the oldest shares first. Specific identification lets you choose which lots to sell, which can lower the taxable gain. Your broker's rules and your instructions decide what applies.

Where do I find my cost basis? On broker statements and year-end tax forms for many accounts. For older purchases, check trade confirmations. Keep records of improvements to property.

Does basis change with reinvested dividends? Yes. Reinvested dividends buy new shares at the price paid, and each purchase adds to your total basis. Forgetting this leads to overpaying tax on a later sale.