Tax basis what is

If you buy stocks or bonds, your basis is the purchase price plus any additional costs such as commissions and recording or transfer fees. If you have stocks or bonds that you didn't purchase, you may have to determine your basis by the fair market value of the stocks and bonds on the date of transfer or the basis of the previous owner. Refer to Publication , Investment Income and Expenses for more information.

Before figuring gain or loss on a sale, exchange, or other disposition of property, or before figuring allowable depreciation, you must determine your adjusted basis in that property. Certain events that occur during the period of your ownership may increase or decrease your basis, resulting in an "adjusted basis. The tax rate is the same as the individual or corporate tax rate, but they are still capital gains and must be reported separately from income using a separate IRS form and D.

Along with the original price of an asset, the tax basis includes any acquisition costs, such as taxes, fees, commissions and shipping. While a business holds an asset, the tax basis may change. Annual depreciation decreases the tax basis, while capital improvements and reinvested dividends increase the tax basis. For example, different tax bases apply to assets that were bought, received as a gift or inherited. Stocks and bonds: The cost basis is the stock price plus any fees and commissions.

It may adjust over time if the stock distributes dividends; reinvested dividends are added to the original cost basis, so the ultimate tax basis may differ from the original cost basis. Gifts: The tax basis of a gift depends on whether it is sold for a profit or a loss. This prevents the new owner from writing off — and benefitting from — a loss that occurred while the donor owned the asset. This may require researching historical values. Like-kind property or exchange: Non-taxable exchanges such as like-kind exchanges, liquidating partnerships or corporate reorganizations take on the existing tax basis at the time of the exchange.

A business: The buyer of a business assigns each asset in the business a tax basis as a portion of the purchase price. For most assets, calculating the tax basis is straightforward: The tax basis is the adjusted cost basis — or the original cost of the asset adjusted for other factors such as depreciation that affect the value — when the asset is sold. Tax basis starts as the initial purchase price plus all the costs of acquiring the asset, such as sales, property and excise taxes, shipping costs, installation and testing charges and commissions and fees.

Whether following accrual accounting or cash basis accounting , the process of calculating the tax basis of an asset remains the same. Tax basis calculations get more complicated over time as the adjusted cost basis evolves when different factors are added or subtracted.

With stocks, for example, reinvested dividends buy additional shares and therefore are added to the adjusted cost basis. For real estate, the value of buildings depreciates but the value of land does not. So, if a company purchases land then sells it for a profit, there is not depreciation to subtract. Operating expenses such as maintenance costs, however, do not affect the cost basis.

With the single-category method, you add up your total investment in the fund including all those bits and pieces of reinvested dividends , divide it by the number of shares you own, and voila, you know the average basis. That's the figure you use to calculate gain or loss on sale. When it comes to determining whether a gain or loss is long- or short-term, you assume the shares sold are those you've owned the longest. The single-category method is gaining more and more converts because an increasing number of funds are actually doing the work for shareholders.

The funds often send out an extra statement each year—a copy of which currently does not go to the IRS —showing the single-category average basis of shares redeemed during the year. You can switch between specific identification and FIFO whenever you wish, but once you use one of the average basis methods for a fund, you're stuck with it for as long as you own shares in that fund.

One area that's easy to overlook when figuring your basis—particularly if you sell all your shares in a fund at once—is shares that you've acquired through automatic reinvestment.

When you purchase shares using reinvested dividends, it's as if the dividends were paid to you in cash, and then you immediately used that cash to purchase new shares. The amount of the distribution that you use to purchase each share is the original cost basis for that share.

Thanks to a law passed in , taxpayers receive help keeping track of their tax basis. The law requires brokers to track the basis of specified securities including stocks and mutual fund shares purchased in and later years, and report the basis amounts to investors and the IRS when the securities are sold.

As stated, however, the new basis reporting rules which are phased-in over three years only apply to specified securities that are acquired in and beyond. Therefore, brokers need not supply basis information for security sales that occurred in or earlier years.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Skip To Main Content. Purchases The tax basis of stock you purchase is what you pay for it, plus the commission you pay. Gifts The basis of securities you receive as a gift depends on whether your ultimate sale of the stock produces a profit or loss.

Inheritance When you inherit stock or other property, your basis is usually the value of the asset on the date of death of the previous owner. Married couples, joint tenants If you own stock or other assets with a spouse as joint tenants or tenants by the entirety—forms of ownership often used by married couples that ensure that on the death of one co-owner the survivor becomes the sole owner—the basis of what is transferred to the survivor is adjusted upward on the death of the co-owner.

Determining stepped-up basis If you inherit stocks or other assets, be sure to pinpoint the stepped-up basis. Divorce Thanks to the tax law, in a divorce settlement one piece of property can be worth far more than another with exactly the same market value. Stock splits When a company in which you own stock declares a stock split, your basis in the shares is spread across the new and old shares.

Dividend reinvestment Your basis in shares purchased through a dividend-reinvestment plan is the stock's cost. Mutual funds Except for money market funds, in which the value of shares remains constant, the price of mutual fund shares fluctuates, just like the price of individual stocks and bonds. Shares purchased through dividend reinvestment One area that's easy to overlook when figuring your basis—particularly if you sell all your shares in a fund at once—is shares that you've acquired through automatic reinvestment.

Adjusted basis Finally, you may need to adjust the basis of your mutual fund shares in certain circumstances: Undistributed capital gains. If your mutual fund sends you a Form Notice to Shareholder of Undistributed Long-Term Capital Gains increase your basis by the amount of undistributed capital gain that you include in income and reduce your basis by the amount of tax paid by the fund on the undistributed gain both amounts are reported to you on Form Return of capital nontaxable distributions.

Reduce your basis but not below zero by the amount of any "return of capital" nontaxable distributions that you receive from the mutual fund. They are not the same as capital gain distributions or exempt-interest dividends. Help is on the way Thanks to a law passed in , taxpayers receive help keeping track of their tax basis. Got investments? State additional.