What Is Cost Basis and What Changes It?
Every capital gain or loss is the sale price minus one number. That number is your cost basis, and it moves more often than most traders expect.
Definition
Cost basis: What you paid to acquire shares, including commissions and fees, adjusted for later events such as splits and wash sales. Gain or loss on a sale is measured from it.
Also called Tax basis.
If the basis is wrong, the reported gain is wrong too.
Basis starts as what you paid for the shares, including commissions and fees. Buy 150 shares at 20.00 with a 5.00 fee and the basis is 3,005, not 3,000; when you later sell, the proceeds are measured against that figure, and the fees on the sale reduce the proceeds, so both ends of the trade end up in the result.
From there it can change. Corporate actions adjust it. So do tax rules, and so do your own reinvestments, and none of them require you to place a trade or even notice that anything has happened to a number the platform recalculates in the background.
The events that move it
A stock split spreads the same basis across more shares. The total stays put and only the per-share figure changes.
A reverse split works the other way: fewer shares, same total, higher basis per share. If a fractional share gets paid out in cash, that counts as a small sale. It takes its own slice of basis.
Wash sales add to basis. When a loss is disallowed because you bought the same stock back within the IRS window, the disallowed amount is added to the basis of the replacement shares, as the entry on the wash sale rule works through in detail.
Reinvested dividends create new lots. Each reinvestment is a purchase. Its basis is the amount reinvested, and its date is the day it bought. Forget those lots and you pay tax twice: once on the dividend when it was paid, and again on the same money as if it were gain when you sell.
An odd profit or loss the morning after a split is a signal. Check that the basis carried across. Mistakes do happen, and fixing one usually takes a request to the broker.
Lots and lot methods
A lot is one purchase. Three buys on three days make three lots. Each has its own basis and its own holding period. When you sell part of the position, the method decides which lots leave.
- FIFO, first in first out, sells the oldest lots first. Many brokers use it as the default.
- Specific identification lets you name the lots at the time of the sale.
- Average cost blends the lots into one per-share figure, for certain funds.
The choice can swing the tax result on a single sale, which is why choosing tax lots before selling is worth the effort. The default lives on your broker’s cost basis settings page. Leave it alone and the default decides for you. With specific identification, the lots generally have to be named by the time of the sale, so choosing afterward, once you know which answer you’d prefer, is too late; check how your platform records the choice.
Where to find it
Most platforms show basis on the positions page, usually as an average per share. Open the individual lots. That view is the one to trust. It shows each purchase date, share count and basis, including adjustments.
After year end, the 1099-B lists each sale with its proceeds, its basis and any wash sale adjustment, and for shares the broker treats as covered, the broker reports that basis to the IRS as well, so the figure you file is checked against theirs. For older positions, or shares transferred in from another broker, the basis may be missing or marked as not reported, and supplying it falls to you.
That’s where your own records count most. Keep trade confirmations. Keep notices of splits and reinvestments too. The platform doesn’t always have the last word on what you paid. The full list is in what records a trader should keep for taxes.