Cost basis is the original purchase price of an investment, adjusted for dividends, splits, and return-of-capital distributions. When you sell an investment, the IRS taxes the difference between your sale proceeds and your cost basis — that difference is your capital gain (taxable) or capital loss (deductible). The higher your basis, the lower your taxable gain.

How is cost basis calculated?

For a simple purchase, cost basis equals the purchase price plus any commissions or fees paid. For multiple purchases of the same security at different prices, you have choices about which shares to use when selling — FIFO (first in, first out), specific share identification, or average cost (for mutual funds). The method you choose determines which basis applies and how much gain you realize.

What is step-up in basis for inherited assets?

When you inherit an asset, the cost basis is 'stepped up' to the fair market value on the date of the deceased person's death. This means if someone bought stock for $10,000 and it was worth $90,000 when they died, you inherit it with a $90,000 basis — not $10,000. If you immediately sell for $90,000, you owe no capital gains tax. The step-up erases all embedded gains.

What happens to cost basis when a stock splits?

In a stock split, your total investment value stays the same, but the number of shares increases and the price per share decreases proportionally. Your total basis doesn't change — it just spreads across more shares. In a 2-for-1 split, 100 shares at $80 basis per share becomes 200 shares at $40 basis per share. Total basis remains $8,000.

How do reinvested dividends affect cost basis?

When you reinvest dividends — through a DRIP (dividend reinvestment plan) or automatically — each reinvestment creates a new lot of shares with its own cost basis equal to the price at reinvestment. These lots increase your overall basis over time, reducing the taxable gain when you eventually sell. Failing to track reinvested dividends leads to paying capital gains tax twice on that income.

What is the difference between covered and uncovered securities for cost basis?

Covered securities are those where your broker is required to track and report cost basis to the IRS — generally stocks purchased after 2011 and mutual funds after 2012. For uncovered securities (older purchases), brokers report proceeds but not basis. You are responsible for tracking your own basis for uncovered securities using purchase records, brokerage statements, and Form 1099-B.

Cost Basis 2026 — What It Is, How to Calculate It, and Why It Matters for Taxes

Cost basis is the number that determines how much tax you owe when you sell an investment. Get it right and you could save hundreds or thousands of dollars. Ignore it, and you may pay tax on gains you’ve already paid tax on — or on gains you don’t actually have.

Why Cost Basis Matters

$$\text{Capital Gain or Loss} = \text{Sale Proceeds} - \text{Cost Basis}$$

The IRS taxes the gain. A higher basis means a smaller gain — and less tax. A lower basis means a larger gain.

Example: You sell 100 shares of a stock for $8,000.

If your basis is $3,000 → $5,000 taxable gain
If your basis is $6,500 → $1,500 taxable gain
If your basis is $9,000 → $1,000 capital loss (deductible)

How Cost Basis Is Calculated

Simple Purchase

For a single purchase with a brokerage commission:

$$\text{Basis} = \text{Purchase Price} + \text{Commissions and Fees}$$

Example: 100 shares at $45 each + $9.99 commission = $4,509.99 total basis ($45.10 per share)

Since most brokers now offer commission-free trading, basis is typically just the purchase price.

Multiple Purchases (Lots)

If you bought the same stock multiple times at different prices, you have multiple “lots”:

Purchase Date	Shares	Price Per Share	Lot Basis
Jan 2023	50	$40	$2,000
Jun 2023	50	$55	$2,750
Dec 2024	100	$62	$6,200
Total	200		$10,950

When you sell, which lot you’re selling determines your gain or loss.

Cost Basis Methods

FIFO (First In, First Out)

The IRS default for most securities. The oldest shares are assumed sold first. If you sell 50 shares from the example above, FIFO sells the January 2023 lot at $40/share basis.

When FIFO helps: If your oldest shares have the highest basis (you bought when prices were higher).
When FIFO hurts: If your oldest shares have the lowest basis (you bought cheap, and they’ve appreciated the most — FIFO sells those first, maximizing your taxable gain).

You designate exactly which shares you’re selling. This gives you the most control over your tax outcome. You can choose to sell high-basis shares first to minimize current-year gains — or low-basis shares to realize losses for harvesting.

Requirement: You must identify specific lots at the time of sale (before settlement). Keep records of your election. Most modern brokers let you do this in the order ticket.

Average Cost (Mutual Funds Only)

For mutual funds, you can elect average cost — the total basis divided by total shares.

$$\text{Average Cost Per Share} = \frac{\text{Total Basis}}{\text{Total Shares}}$$

From the example above: $10,950 ÷ 200 shares = $54.75 per share average basis

This simplifies record-keeping but gives you less control over which gains are realized.

Special Situations

Inherited Assets — Step-Up in Basis

Inherited assets receive a stepped-up basis to fair market value on the date of death. This eliminates all pre-death appreciation from taxation.

Example: Parent bought stock for $5,000 in 1990. Value at death in 2026: $180,000.
Your basis: $180,000. If you sell immediately for $180,000: $0 capital gain.

Gifted Assets — Carryover Basis

Assets received as a gift generally carry over the giver’s original basis:

If you sell at a gain: Your basis is the giver’s original basis
If you sell at a loss: Your basis is the lower of the giver’s basis OR fair market value at the time of the gift

Example: A friend gifts you shares with a $2,000 original basis now worth $8,000. You sell for $8,000 → $6,000 gain (taxed to you).

Reinvested Dividends

Each dividend reinvestment creates a new lot:

Date	Dividend	Shares Purchased	Price	New Basis
Mar 2024	$85	1.2 shares	$70	$85
Jun 2024	$90	1.1 shares	$82	$90
Sep 2024	$92	1.0 shares	$92	$92

These lots accumulate over decades of DRIPs. Track them or you’ll double-pay on that income (once as dividend income, again as understated basis at sale).

Stock Splits

A 2-for-1 split: 100 shares at $80 basis/share → 200 shares at $40 basis/share. Total basis unchanged at $8,000.

A reverse 10-for-1 split: 200 shares at $4 basis/share → 20 shares at $40 basis/share. Total basis unchanged at $800.

Tracking Your Basis

Situation	Who Tracks Basis
Stocks purchased after Jan 1, 2011	Your broker (covered securities — reported to IRS)
Stocks purchased before 2011	You (uncovered — not reported to IRS)
Mutual funds purchased after Jan 1, 2012	Your broker
Gifted assets	You (using giver’s records)
Inherited assets	You (using estate records or appraisal)

Keep all brokerage confirmations, Form 1099-B statements, and purchase records indefinitely — not just for 3–7 years. You may hold investments for decades.

Your cost basis determines your taxable gain or loss when you sell — see 2026 capital gains tax rates for the rates that apply based on your income and holding period. If you receive shares through an ESPP, cost basis tracking requires special attention — see ESPP guide for how shares are priced at vesting and grant. For how cost basis connects to tax-efficient investing, see investment strategies.

Written by WealthVieu

WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.

The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy