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.
A reported gain is only as right as the basis behind it.
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, none of which require you to place a trade or even notice that anything has happened to a number the platform recalculates quietly in the background.
The events that move it
Stock splits spread the same basis across more shares. The total stays put. Only the per-share figure changes.
Reverse splits do the reverse: fewer shares, same total, higher basis per share. A fractional share paid out in cash 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.
A strange profit or loss the morning after a split is a signal. Check that the basis carried across. Mistakes do happen, and the fix usually needs 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. That is why choosing tax lots before selling matters. Your broker’s cost basis settings page is where the default lives. 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 would 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. The lot 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 is the case where your own records matter most. Keep trade confirmations. Keep notices of splits and reinvestments too. The platform is not always the last word on what you paid. The full list is in what records a trader should keep for taxes.