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Cost basis

Definition

Basis, as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/ taxes on a capital gain/ that equals the amount realized on the sale minus the sold property's basis.

The cost basis is the price of an asset or security determined for taxation purposes. The cost basis includes the commissions, expenses, profits, losses, interest or any fees to determine the net gain on which taxes are applicable. The cost basis of an asset changes as time passes on. This is particularly true in stocks and bonds.

Another use of cost basis is to calculate the capital gains tax, which is the tax levied on any profit earned during a financial transaction. This is done by subtracting the cost basis of an asset from its market value at present.

Calculating the cost basis

The methods of calculating the cost basis are numerous, and vary widely in terms of simplicity, and complexity. For instance, in case the asset is the only purchase, and you need to determine the cost basis right after the purchase is completed, then the cost basis will be equal to the price of the asset.

While selling the asset, such as the stock or bond, you need to calculate the cost basis in order to determine the profit on which tax would be applicable. There are various methods to do that. Some of them are:

Simple cost basis calculations

The key to understanding how to calculate a cost basis is to simplify it. Although the financial transactions in real life are significantly more complicated, we need to consider a basic example to gain an understanding of the methods to calculate the cost basis. For instance, if you brought a product for $10 and sold it at $15, then there is a capital gain of $5, and this is the amount on which the tax will be deduced. And the $10 dollars purchase price is the cost-basis for the transaction.

First In, First Out (FIFO)

The FIFO method is used to determine the cost basis by including the price of the first assets you purchased in a series of purchases. This is the method most commonly utilized by the Internal Revenue Service (IRS). The IRS tracks the inventory to determine which of the purchase was made first, and includes that price into the cost basis formula when a sale is made.

Last In, First Out (LIFO)

As the name suggests, LIFO is the method in which the most recently sold products are used to calculate the cost basis and the capital gains for taxation purposes. This method allows the sellers to significantly reduce the income tax in times of inflation.


Further Reading


Trends in park tourism: Economics, finance and management
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… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …

… -term care prospective payment system; updates to certain IPPS-excluded hospitals; and collection of information regarding financial relationships between hospitals …… -term care prospective payment system; updates to certain IPPS-excluded hospitals; and collection of information regarding financial relationships between hospitals …
www.ncbi.nlm.nih.gov [PDF]
… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …

New directions in water economics, finance and statisticsNew directions in water economics, finance and statistics
iwaponline.com [PDF]
… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …

International investment in financial servicesInternational investment in financial services
www.sciencedirect.com [PDF]
… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …

Towards a financial reporting framework for intangiblesTowards a financial reporting framework for intangibles
www.emerald.com [PDF]
… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …

Water pricing and full cost recovery of water services: economic incentive or instrument of public finance?Water pricing and full cost recovery of water services: economic incentive or instrument of public finance?
iwaponline.com [PDF]
… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …

An empirical comparison of published replication research in accounting, economics, finance, management, and marketingAn empirical comparison of published replication research in accounting, economics, finance, management, and marketing
www.sciencedirect.com [PDF]
… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …

Financial contracting, governance structures and the accounting regulation of Islamic banks: an analysis in terms of agency theory and transaction cost economicsFinancial contracting, governance structures and the accounting regulation of Islamic banks: an analysis in terms of agency theory and transaction cost economics
link.springer.com [PDF]
… Figure 3 Cost recovery of Canadian Park agencies in early 1990s Page 9. operate on a multi-year, non-lapsing basis, (c) to increase non-tax revenues from products and services, (d) to borrow against future revenue, (e) to link revenues to costs, and (f) to depreciate assets …



Q&A About Cost basis


Why should you know how to calculate your cost basis?

Knowing how to calculate your own personal cost basis will help you determine if a stock has increased or decreased in value over time. This information can be used when making decisions regarding selling stocks that have increased in value or buying stocks that have decreased in value. It also helps investors understand their overall portfolio performance over time as well as tax implications for capital gains taxes on investments sold at a profit or loss on investments held for more than one year but less than two years before being sold at a loss .

What are some methods used to calculate the cost-basis?

There are numerous methods that vary widely in terms of simplicity and complexity. Some examples include First In, First Out (FIFO) or Last In, First Out (LIFO).

What does "Cost Basis" mean?

Cost basis means the original price of an investment, plus any reinvested dividends.

What is the cost basis?

The cost basis is the price of an asset determined for taxation purposes.

What is another use of cost basis?

Another use of cost basis is to calculate capital gains tax, which is a tax levied on any profit earned during a financial transaction.

How can you calculate your cost basis?

You can calculate your cost basis by taking the original price of an investment and adding any reinvested dividends.

How do you increase your cost basis?

Reinvesting dividends increase your cost basis.

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