Invest for what you keep
Subscribe

Concept · Tax in investing

What is cost basis, and why does everything depend on it?

Direct answer Cost basis is what you paid for a position, adjusted for later events. Gain or loss at sale is price minus basis. A harvested loss lowers the replacement lot's basis; a return-of-capital payout lowers it too; a disallowed wash-sale loss raises it; death resets it to market value. Every lever on this site moves basis or the timing of the sale.

Brokers track basis lot by lot and report it on Form 1099-B for shares bought since 2011. Which lot you sell matters: selling the highest-basis lot first realizes the smallest gain, and most brokers let you pick.

Basis is also what makes “tax-free” claims easy to check. If a payout is untaxed because it lowered your basis, the tax was deferred, not removed. Read return of capital is a deferral, not an exemption.

Sources

  1. IRS Publication 550, basis of investment propertyirs.gov
  2. IRC §1014, step-up at deathlaw.cornell.edu

Used in

Direct indexing, in one page Own the 500 stocks instead of the fund that owns them. A $1.16 trillion business built on that idea. What you get, what you pay, and who it fits. Exchange funds, for one big stock Contribute one concentrated stock to a partnership, receive a slice of everyone's, pay no tax, wait seven years. The fee is 0.4% to 0.95% a year, and a fifth of the fund is real estate by law. Loss harvesting, in one example Sell a stock at a $10,000 loss, buy a similar one the same day, and the loss cuts this year's tax bill by up to $5,210. What actually happened, step by step, and the catch. Section 351: moving a portfolio into an ETF without selling Since December 2024, 113 ETFs have launched by taking in investors' stock portfolios for shares, no gain recognized, about $21 billion so far. The two tests, and why the IRS has not said yes. The lever worth the most is never selling A $100,000 position with a $40,000 gain costs $14,040 of tax to sell. Held to the estate it costs nothing; given to charity it earns a deduction. The quiet lever at the top of the ranking. Why the harvesting benefit fades after a few years In AQR's simulation harvesting adds 155 basis points in year one and nothing by year five without new cash. Live accounts show the same curve. Why it fades, and the three things that keep it alive.

Related concepts

Return of capitalStep-up in basisTax-loss harvestingWash-sale rule

Read the tax in investing topic