Cost basis
What is Cost basis?
Cost basis is the tax-adjusted amount assigned to an asset or tax lot for calculating gain, loss, depreciation, or related tax consequences.
A robust tax-lot ledger is append-only and auditable. Corrections should preserve the previous value, reason, evidence, source, effective date, and approver. Recomputing every historical lot from today's instrument record can erase corporate-action decisions and create artificial gains or losses in prior reporting.
For pooled and private holdings, capital calls, distributions, allocations, foreign currency, and partnership adjustments can require specialized records beyond ordinary brokerage lots and should remain clearly separated. Provisional estimates should be replaced only through controlled, fully evidenced accounting adjustments.
Starting basis
For a purchase, starting basis commonly includes price and certain acquisition costs. Gifts, inheritance, employee compensation, partnership interests, reorganizations, and transfers can use different rules. Market value on the transfer date is not automatically basis. Documentation from the original acquisition can remain necessary after an asset moves between brokers.
Adjustments
Reinvested distributions can add basis, while return-of-capital distributions can reduce it. Splits allocate basis across more shares, and mergers, spin-offs, rights, options, wash sales, and improvements can shift or defer amounts. Adjusted basis therefore changes over time even when no additional open-market purchase occurs.
Tax lots and elections
Each acquisition can create a lot with its own date, quantity, currency, and basis. On disposal, specific identification, FIFO, average cost, or another permitted convention selects the matched lot. The choice changes current realized gain, remaining basis, holding period, and future tax, but does not change the portfolio's pre-tax economic value.
Data quality
Broker-reported basis can be incomplete for old, transferred, foreign, private, or noncovered holdings. Corporate actions and manual journals introduce errors. Reconcile quantities and total basis to confirmations, statements, issuer notices, and prior filings. Unknown basis should remain an exception requiring evidence rather than being silently guessed.
Portfolio applications
Accurate basis supports tax-aware rebalancing, harvesting, withdrawal selection, after-tax return, and transition planning. Show both tax basis and economic book cost where they differ. Preserve jurisdiction and account because one asset may have multiple valid bases for different purposes. Qualified tax professionals should resolve uncertain legal treatment.
Sources and further reading
- Basis of Assets, Internal Revenue Service
- Publication 550: Investment Income and Expenses, Internal Revenue Service