Legal Definitions - cost basis

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.