Also called tax basis, cost basis is the original cost of acquiring a property (usually its purchase price plus any commissions or fees), for tax purposes. It is primarily used for computing capital gain or loss from the transfer of property and is described either in terms of the dollar amount spent or the per share price paid to acquire property. For gifts, a beneficiary’s cost basis is the same as that of the original holder who gave the gift. Cost basis is also used to describe the difference between the spot (or current) price and future price of a commodity.
To determine the cost basis for assets that are purchased at different times and prices, the IRS requires use of the first-in, first-out (FIFO) accounting method.
Reinvesting capital gains distributions and dividends increases the tax basis of one’s investment, which must be accounted for in order to report a lowering capital gain and tax liability.
[Last updated in June of 2021 by the Wex Definitions Team]