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Cost Basis

Cost basis is the original purchase price or value of an asset, such as stocks, bonds, real estate, or other investments. It is a reference point for determining the capital gain or loss when the asset is eventually sold or disposed of.

What You Need To Know

The cost basis represents the amount of money or value that was initially invested in acquiring the asset. It includes the purchase price, transaction fees, and any other expenses directly related to the acquisition.

Over time, an asset's cost basis may be adjusted or increased to account for certain events or transactions. For example, if an investor makes significant improvements to a property, the cost basis can be increased to reflect the additional investment.

When an asset is sold or disposed of, the difference between the selling price and the cost basis determines the capital gain or loss. If the selling price is higher than the cost basis, it results in a capital gain. Conversely, if the selling price is lower, it leads to a capital loss.

The cost basis plays a crucial role in determining the tax liability associated with the sale of an asset. The capital gain or loss is subject to taxation, with different tax rates and rules depending on the holding period and the type of asset.

In the case of investments like stocks, the cost basis may need adjustments to account for dividends, stock splits, or distributions received during the holding period. These adjustments can affect the cost basis and subsequently impact the capital gain or loss.