Cost Basis
The original purchase price of an asset (plus adjustments like commissions and reinvested dividends), used to calculate capital gain or loss when you sell.
Cost basis is the original value of an asset for tax purposes, typically the purchase price plus any associated costs like commissions, fees, and in some cases reinvested dividends or capital improvements. When you sell the asset, your capital gain or loss equals the sale price minus your cost basis.
For stocks and mutual funds, cost basis is usually straightforward — what you paid per share. But it can become complex with reinvested dividends, stock splits, mergers, or inherited assets. Inherited assets receive a "stepped-up" basis equal to the fair market value on the date of the decedent's death, which can eliminate decades of unrealized gains.
Brokerage firms are required to report cost basis to the IRS for stocks acquired after 2011 and mutual funds acquired after 2012. You can choose from several cost basis methods: specific identification (choosing which shares to sell), FIFO (first in, first out), or average cost (for mutual funds). The method you choose can significantly impact your tax bill when selling partial positions.
How it works
Cost basis is the number you subtract from your sale proceeds to find capital gain or loss. It starts as the purchase price plus commissions and fees, and it moves over time — reinvested dividends add to it, stock splits divide it per share, and inherited assets get a stepped-up basis equal to fair market value on the date of death. Because basis compounds through corporate actions and reinvestment, the number your brokerage shows years after purchase is rarely just what you originally paid.
You meet cost basis on Form 1099-B, where your broker reports proceeds and, for shares acquired after the 2011/2012 covered-security rules, the basis itself. That number carries onto Schedule D and Form 8949 when you file, where gain or loss is calculated share lot by share lot. Before you place a sell order, most brokerage platforms let you pick which cost-basis method applies to that lot — specific identification, FIFO, or average cost for mutual funds — and that choice is made at the trade itself, not later at filing.
Reinvested dividends are the most commonly missed basis adjustment — if you do not add them in, you overstate your gain and pay tax twice on the same dollars, once when the dividend was reported as income and again when it is taxed as gain on sale. Inherited assets reset basis entirely, which is why holding low-basis stock until death rather than gifting it during life can eliminate the embedded gain for heirs. Gifted assets, by contrast, generally carry over the donor's original basis rather than stepping up.
Example: basis with reinvested dividends
You buy 100 shares of a stock for $2,000, and over five years $300 of dividends are automatically reinvested into more shares rather than paid out in cash. Because those dividends were already reported and taxed as income each year, they also add to your cost basis.
Your adjusted cost basis is $2,000 plus $300, or $2,300. If you sell the entire position for $3,000, your taxable gain is $700 — not $1,000 — because the reinvested dividends already increased your basis.
2026 capital gains quick estimate
Estimate the additional federal tax caused by your gains. Uses the standard deduction; state tax is not included.
Assets held more than one year.
Assets held one year or less.
Federal tax caused by gains
$7,500Incremental estimate versus the same ordinary income with no gains.
Long-term gains tax
$7,500Top LTCG band reached: 15%
3.8% NIIT
$0No NIIT at these inputs.
Frequently asked questions
Does cost basis include the commission I paid to buy a stock?
What is my cost basis for inherited stock?
Do I have to use FIFO when selling shares?
Related Terms
Capital Gains
The profit from selling a capital asset (stocks, real estate, etc.) for more than its purchase price. Capital gains are classified as short-term or long-term based on holding period.
Short-Term Capital Gains
Profits from selling assets held for one year or less, taxed at ordinary income tax rates (10% to 37%). There is no preferential rate for short-term gains.
Long-Term Capital Gains
Profits from selling assets held for more than one year, taxed at preferential rates of 0%, 15%, or 20% depending on your taxable income.
Wash Sale Rule
An IRS rule that disallows a capital loss deduction if you buy a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the new shares.