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Simple English definitions for legal terms
cost basis
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A quick definition of cost basis:
Cost basis is the original cost of buying something, like a house or stock, for tax purposes. It helps you figure out how much money you made or lost when you sell it. If you get a gift, your cost basis is the same as the person who gave it to you. If you buy something at different times and prices, you have to use the first-in, first-out method to figure out your cost basis. If you reinvest your profits, your cost basis goes up, which can lower your taxes.
A more thorough explanation:
Definition: Cost basis, also known as tax basis, refers to the original cost of acquiring a property for tax purposes. This includes the purchase price of the property as well as any commissions or fees associated with the purchase. It is primarily used to calculate capital gain or loss when transferring property and can be expressed as either a dollar amount or per share price.
For example, if you purchase a stock for $50 per share and later sell it for $75 per share, your capital gain would be $25 per share. However, if you had reinvested dividends and capital gains distributions, your cost basis would be higher, resulting in a lower capital gain and tax liability.
The cost basis is also used to determine the difference between the spot or current price and future price of a commodity. For instance, if you purchase a barrel of oil for $50 and sell it for $75, your cost basis would be $50.
When assets are purchased at different times and prices, the IRS requires the use of the first-in, first-out (FIFO) accounting method to determine the cost basis. Additionally, if a gift is given, the beneficiary's cost basis is the same as the original holder who gave the gift.
Overall, cost basis is an important concept for calculating capital gains and losses and determining tax liability.