The cost basis is the original price of an asset - usually the purchase price plus commissions. You use the cost basis to calculate capital gains and capital losses, depreciation, and return on investment.
If you inherit assets, such as stocks or real estate, your cost basis is the asset's value on the date the person who left it to you died (or the date on which his or her estate was valued). This new valuation is known as a step-up in basis.
For example, if you buy a stock at $20 a share and sell it for $50 a share, your cost basis is $20. If you sell, you owe capital gains tax on the $30-a-share profit.
If you inherit stock that was bought at $20 a share but valued at $50 a share when that person died, your cost basis would be $50 a share, and you'd owe no tax if you sold it at that price.
- Browse Related Terms: Basis, Basis price, Capital Gain, Capital gains tax (CGT), Capital loss, Community property, Convertible hedge, Cost basis, Earnings, Fund family, Investment Income, Long-term capital gain (or loss), Paper profit (or loss), Phantom gains, Profit, Realized gain, Return, Return on investment, Sell short, Step-up in basis, Unrealized gain, Unrealized loss, Wash sale