How to Figure Cost Basis?
Cost basis is the total amount of money you spend to make an investment of some kind. investors have to figure cost basis anytime they sell, or liquidate, an investment. This is because cost basis must be used to calculate capital gains or losses when filing an income tax return. Capital gains refer to proceeds from selling an investment such as stocks, bonds or real estate, minus your cost basis. The procedure for figuring cost basis is similar for any investment.
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Instructions
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Add the original price of your investment and any transaction costs. For example, if you buy 100 shares of stock at $10 per share and pay a $20 broker’s commission, your purchase expense totals $1,020.
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Disregard dividends or other income you receive as cash while you own the investment. Dividends or interest are classified (and taxed) by the Internal Revenue Service as ordinary income and do not increase or decrease your cost basis.
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Add any additional money you invest (plus transaction costs) to your original purchase expenditure. Most often, such additional investment is in the form of reinvested dividends. Another example is money you spend for improvements to a real estate investment.
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Add the transaction costs you pay when you liquidate the investment. If the original purchase expenditure for 100 shares of stock was $1,020, and you paid $30 in transaction fees to sell the shares, your total investment expenditure comes to $1,050. This is your cost basis.
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Tips & Warnings
Use IRS Schedule D to report cost basis and capital gains or losses. If the proceeds from the sale of your investment are greater than the cost basis, you have a capital gain. If your cost basis exceeds your proceeds from the sale, it is a capital loss.
Although figuring cost basis for investments like real estate works the same as for any other investment, there are some complications. For example, you can include some expenses made to improve the property. However, you may not include in your cost basis items like property taxes and routine maintenance costs you paid while you owned the property.
