Cost basis

Explanation

Cost basis is generally the price you paid for an asset plus purchase costs such as commissions. It gets adjusted over time: reinvested dividends add new basis (you already paid tax on them), and some corporate actions, like return-of-capital distributions, reduce it. When you sell, only the difference between the sale proceeds and your basis is a capital gain or loss.

If you bought shares at different times and prices, each purchase is a separate tax lot. When you sell part of a position, the lots you sell determine your gain. Common methods are:

• FIFO (first in, first out): the oldest shares are sold first. Often the default.
• Specific identification: you choose the lots, for example the highest-cost ones to minimize gains.
• Average cost: allowed for mutual funds and many ETFs at some brokers.

Basis rules also change at certain events. Inherited assets usually get a step-up to their value at the date of death. Gifted assets generally keep the giver’s basis (carryover basis).

Retirement accounts work differently: there is no capital gains basis inside a 401(k) or IRA. In scenarios, the app tracks basis for taxable brokerage balances so it can estimate the capital gains tax each time it sells to fund spending.

Example

You buy 100 shares at $50, paying $5,000. Over a few years, $300 of dividends are reinvested into more shares.

• Cost basis: $5,000 + $300 = $5,300
• You later sell everything for $8,000.
• Capital gain: $8,000 − $5,300 = $2,700

If you had forgotten the reinvested dividends and reported a $5,000 basis, you would report a $3,000 gain and pay tax twice on that $300.

Lot choice: suppose you hold Lot A (bought at $40) and Lot B (bought at $70), and you sell one share at $65. Selling Lot A creates a $25 gain; selling Lot B creates a $5 loss.