What is cost basis? It is the term used for the tax cost of an asset. It usually starts out as the purchase price (plus commissions and fees) but "stuff" happens that can cause it to change. Things called corporate actions occur such as stock spinoffs, mergers, splits, split-offs, rights, or return of capital, all of which affect your cost basis. These are also called corporate reorg (reorganization) actions. Did you know thatclass action claim checksand even a corporate headquarters move (change of domicile)can affect your cost basis?
Totally confused? Keep reading and we will help you out.
We explain in plain English the events that can affect your cost basis and the steps you need to take to calculate it. We give you ideas about what questions to ask and where to go to find the information you need.
Why do we even care about cost basis? Because you are going to need to know it when you sell the asset. The taxable capital gain will be the difference between the selling price and your cost basis. The higher the cost basis, the less capital gains tax you will have to pay.
Your cost basis depends upon your answers to the following types of questions: