Cost Basis

May 27, 20222 min read
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For investors that purchase stocks or bonds, the cost basis will usually refer to the price paid for certain security, reinvestment amounts of dividends, capital gains distribution, or any other costs, fees, and commissions included in the transaction.

For the sake of the investor, and to simplify matters, a broker or fund manager will issue a cost basis form to investors once they have finalized the purchase of a security to ensure they have the necessary information at hand when the investors require to issue a claim or loss for tax purposes.

The cost basis can be found on the confirmation letter exchanged between you, the investor, and the fund or brokerage manager.

Important things to remember:

  • Cost basis is the original price one paid for a specific asset or security.
  • To calculate capital gains on assets and securities, investors can subtract the cost basis from the market value at the time of sale.
  • Depending on the investment, brokerage firm, or business that issued the securities, they can choose from different cost basis models to calculate the capital gains or losses.

Why use a cost basis?

Simply put, the cost basis model is used to help determine either a profit or loss on a specific asset or security, and whether to determine it’s liable for tax.

In some cases, when a business is sold, both the profit and losses of capital assets will need to be determined separately by using a cost basis asset model.