Cost Basis
Definition
The original purchase price of an asset, adjusted for stock splits, dividends, and return of capital, used to calculate capital gains or losses when you sell.
Cost basis is the foundation of all capital gains tax calculations. It represents what you originally paid for an asset, including the purchase price plus any commissions or fees. When you sell an asset, your taxable gain or loss equals the sale price minus your cost basis.
While the concept is simple, tracking cost basis accurately becomes complicated with multiple purchases at different prices (tax lots), stock splits, reinvested dividends, corporate actions, and gifts or inheritance. Each of these events can adjust your cost basis.
The IRS requires brokerages to report cost basis for stocks purchased after 2011, mutual funds after 2012, and other securities after 2014. For crypto assets, exchanges are just beginning to report cost basis, and many older transactions have no broker-reported basis.
Different cost basis methods (FIFO, LIFO, specific identification, average cost) can produce dramatically different tax outcomes. Choosing the right method depends on your tax situation — FIFO often works for long-term holders, while specific identification gives active traders the most control.
For investors with assets across multiple platforms, maintaining accurate cost basis requires consolidating data from all accounts. Transfers between wallets or brokerages don't change your cost basis but can make tracking more difficult when the receiving platform doesn't have your original purchase data.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
What happens to cost basis when you transfer crypto between wallets?
Your cost basis stays the same when transferring between your own wallets — it's not a taxable event. However, the receiving wallet or exchange may not know your original cost basis, which is why tracking tools that follow transfers are valuable.
How is cost basis calculated for gifted assets?
For gifts, you generally inherit the donor's cost basis (carryover basis). However, if the asset's fair market value at the time of the gift is less than the donor's basis, special rules apply for determining loss.