What is the difference between cost basis and market value?

Cost basis is the original value of an asset for tax purposes, including purchase price and acquisition costs. Market value is the current price at which an asset could be sold in the open market. Cost basis is fixed (unless adjusted), while market value fluctuates daily. The difference between market value and cost basis determines your unrealized gain or loss.

How do I find my cost basis for old investments?

For investments purchased after 2011 (covered securities), your brokerage firm is required to track and report your cost basis on Form 1099-B. For older investments or non-covered securities, you may need to consult old brokerage statements, trade confirmations, dividend reinvestment records, or annual reports. If records are unavailable, the IRS may allow you to use a "zero basis," meaning the entire sale proceeds are treated as taxable gain, which is generally unfavorable.

Can I change my cost basis method?

For stocks and ETFs, you can typically choose a different cost basis method (e.g., specific identification) each time you sell shares, provided you instruct your broker. For mutual funds, once you elect the average cost method, you generally must continue to use it for all sales of that specific fund, unless you obtain IRS permission to change.

Does cost basis apply to retirement accounts like IRAs or 401(k)s?

Yes, but differently. In traditional IRAs and 401(k)s, all contributions and earnings grow tax-deferred, and distributions are generally taxed as ordinary income. Therefore, the concept of cost basis for individual securities within these accounts is less relevant for calculating capital gains/losses on distributions. However, if you make non-deductible contributions to a traditional IRA, those contributions establish a cost basis (sometimes called "basis in nondeductible contributions") which is important for determining the tax-free portion of future distributions. Roth IRAs have a cost basis equal to your contributions, which are always tax-free upon qualified withdrawal.

What happens to cost basis if I inherit an investment?

When you inherit an investment, its cost basis is typically "stepped up" to its fair market value on the date of the original owner's death. This means that any appreciation in value during the decedent's lifetime is generally not subject to capital gains tax for the heir.

What is a wash sale and how does it affect my cost basis?

A wash sale occurs when you sell a security at a loss and then repurchase a "substantially identical" security within 30 days before or after the sale. The IRS disallows the loss for tax purposes. Instead, the disallowed loss is added to the cost basis of the newly acquired shares, effectively postponing the loss recognition until those new shares are sold.

How do dividends affect cost basis?

If you reinvest dividends, each reinvestment creates new shares with their own cost basis, increasing your total cost basis in the investment. If you receive dividends as cash, they are typically taxed as income and do not affect the cost basis of your existing shares.

Cost Basis Explained: A Complete Investing Guide | One…