Cost basis
is defined as the amount of money originally put into an investment before any growth or loss. This includes the initial investment as well as fees and commissions paid to obtain the investment. Cost basis is primarily used to calculate the capital gain or loss on an investment for tax purposes. It is very important to know since the Internal Revenue Service determines how much you should pay in taxes or deduct from your taxes based on the cost basis.
Instructions
Define Cost Basis
1. Determine how you want your cost basis stated. It can be listed as the number of dollars originally placed in the investment. This is how cost basis is usually stated. It can also be characterized by the effective price per share paid for the investment. This way the cost basis can be compared to the share price at which the investment was sold.
2. Be aware that cost basis must be adjusted for changes in an investment since the money was first placed there. Stocks often change over time. They can split or consolidate or spin off new companies. Stock splits, dividends and capital distributions must be factored in to determine the original value and cost basis.
3. Understand the importance of cost basis when calculating your capital gain or capital loss on an investment. The IRS wants to know what you gained or lost on an investment. To determine this, you must know how much you originally invested. Subtract this from how much you sold the investment for. If it's a positive number that's your capital gain. If it's a negative number then that's your capital loss.
4. Factor in fees and taxes. The Internal Revenue Service does not tax fees and taxes paid to obtain your investment. They are therefore not added to the cost basis. These include commissions, sales charges, transfer fees, sales tax and excise tax. Be sure to subtract them your original purchase price to determine your cost basis.
5. Ask your stock broker or mutual fund company to tell you your cost basis. It can be difficult to determine yourself. It is easy to forget what you invested years ago. You may have also purchased the same investment several times at different prices then sold it all at once. Stock brokers and mutual fund companies keep track of these things. It should automatically be on your year end statement and tax forms. If you can't find it give them a call.
