Cost basis, as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/(saves) taxes on a capital gain/(loss) that equals the amount realized on the sale minus the sold property’s basis.
From Publication 551: “Basis is the amount of your investment in property for tax purposes. Use the basis of property to figure depreciation, amortization, depletion, and casualty losses. Also use it to figure gain or loss on the sale or other disposition of property.”
The cost basis of any investment is the original value of an asset adjusted for stock splits, dividends and capital distributions. It is used to calculate the capital gain or loss on an investment for tax purposes. The calculation of cost basis can be complicated, however, due to the many changes that will occur in the financial markets such as splits and takeovers.
For example: If the company splits its shares, this will affect your cost basis per share. Remember, however, that while a split changes an investor’s number of shares outstanding, it is a cosmetic change that affects neither the actual value of the original investment, nor the current investment. Continuing with the above example, imagine that the company issued a 2:1 stock split where one old share gets you two new shares. You can calculate you cost basis per share in two ways: First, you can take the original investment amount ($10,000) and divide it by the new amount of shares you hold (2,000 shares) to arrive at the new per share cost basis ($5 $10,000/2,000). The other way is to take your previous cost basis per share ($10) and divide it by the split factor (2:1). So in this case, you would divide $10 by 2 to get to $5.
How TradeMax Can Help with Cost Basis
TradeMax can help with cost basis calculations. Investors enter original buy and sell transactions into TradeMax. TradeMax will allow you to match sell transactions against appropriate tax lots, and adjust positions and cost basis for corporate actions and wash sales manually.
When importing trade information from some brokers, users may receive baseline positions. These are positions that investors held open at the time their brokers sent their trade data. In order for TradeMax to accurately calculate gain/loss figures, users need to input their cost basis and purchase dates for these baseline positions.