Glossary
Cost Basis
Cost basis is the original amount paid for an investment, including adjustments such as reinvested dividends, used to calculate the taxable gain or loss when it is sold.
If shares bought for $5,000 (with $500 of reinvested dividends added along the way) are sold for $8,000, the taxable gain is $2,500, not $3,000 — the reinvested dividends were already taxed and raise the basis. Inherited assets generally receive a "step-up" in basis to the value at the owner's death.
Why it matters in practice
When selling part of a position, the choice of which tax lots to sell (highest basis, lowest, oldest) changes the tax bill on the same sale. The step-up rule also means that for appreciated taxable holdings, whether to sell late in life or hold for heirs is a genuine tax question. Custodians report basis, but records from old accounts and transfers are worth keeping.
Related terms: Capital Gain · Tax-Loss Harvesting · Dividend · Net Unrealized Appreciation