What Is Cost Basis?

Cost basis determines how much of a sale price is taxable gain (or deductible loss). For stock, cost basis is usually the purchase price plus commissions. For real estate, it includes the purchase price plus closing costs, capital improvements, and certain fees — minus depreciation if taken. Inherited assets receive a 'stepped-up basis' equal to fair market value at the date of death, effectively erasing all unrealized gains. Gifted assets carry over the donor's original basis. When selling shares purchased at multiple prices, the IRS allows several methods: FIFO (first in, first out), specific identification, or average cost (for mutual funds). Choosing the wrong method can result in significantly higher taxes. Wash sale rules prevent claiming a loss if you repurchase substantially identical securities within 30 days — the disallowed loss is added to the replacement shares' basis. Cryptocurrency follows the same cost-basis rules as stock since 2014 (IRS Notice 2014-21), but tracking basis across exchanges, staking rewards, and airdrops is notoriously complex.

Every investment sale triggers a cost-basis calculation. Getting it wrong means either overpaying taxes or underreporting gains — both costly. Situations like employee stock sales (RSUs, ISOs, ESPP), inherited property, cryptocurrency trades, and real estate dispositions have complex basis rules that frequently cause errors on tax returns. A tax advisor can ensure you're using the optimal identification method and capturing all basis adjustments you're entitled to.