What Does Cost Basis Mean?

Cost basis is the price paid for an asset. It is also called tax cost, because it is an amount that has to be on record for tax purposes for when the asset sells. Cost basis applies to any type of asset, such as marketable securities like stock and bonds, real estate, fine art, jewelry and antiques.

Marketable Securities

The cost basis for widely held marketable securities such as stocks, bonds and mutual funds is the price paid for the security plus any commissions paid to acquire the asset. When the asset sells the investor reports either a capital gain or loss on his personal income tax return, based on the cost basis and the sale price. For example, if an investor bought $5,000 worth of stock and paid $25 in commissions, the cost basis is $5,025. If the asset sells for $6,000, the investor reports a capital gain of $975 on his income tax return and pay capital gains tax on this amount.

Real Estate

Real estate cost basis is the price paid for the property plus any capital improvements. The property purchaser keeps the real estate closing statement on file along with a record and receipts of capital improvements. When the property sells, the investor will report a capital gain or loss on his personal income tax return. For example, if an individual buys property for $300,000 and has $50,000 in capital improvements, the cost basis is $350,000. If the property sells for $250,000, then a $100,000 capital loss reports on the personal Form 1040.

Fine Art, Jewelry and Antiques

Cost basis works the same for tangible personal property like fine art, jewelry and antiques as it does for marketable securities and real estate. The cost basis is the price paid plus any commissions for the purchase of the item, and the difference between the cost basis and the sale price reports on the investor personal income tax return.

Keep Records

It is crucial for tax reporting purposes that cost basis information records are on file. For marketable securities most financial institutions that hold securities accounts are able to easily provide this information, but the investor still needs to keep permanent records on cost basis. For real estate and tangible property cost basis records need to be in a safe place, and many individuals provide copies of this information to a CPA or other tax professional for safekeeping.