Cost Basis What It Is: Cost basis refers to the original price of an asset. Cost basis is sometimes called tax basis . How It Works/Example: Let?s assume you purchase 100 shares of XYZ Company stock for $5 per share, and you pay a $10 commission for the purchase. Your cost basis would be: (100 x $5) + $10 = $510 Income realized from the asset, including dividends and capital distributions (even if they are reinvested rather than received in cash) increase the cost basis. Thus in the above example, if your stock paid a $1-per-share dividend every year for three years, your basis would increase to: $510 + (100 x $1 x 3) = $810 Money spent on improvements to an asset (such as certain home improvements) are added to the asset?s cost basis, and depreciation on the asset is subtracted from the cost basis. Why It Matters: An asset?s cost basis becomes very important when the owner sells the asset. The difference between the sale price and the cost basis is called a capital gain (if the sale price is higher than
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