What Is Cost Basis? Definition, How It Works and Examples

For stock you buy, cost basis is the price you paid plus any commissions and transfer fees. The IRS says basis is generally the amount you paid for the asset. Buy 100 shares at $20 and pay a $10 commission, and your basis is $2,010, or $20.10 a share.

Your gain or loss is the sale price minus your basis. Sell those 100 shares for $3,000 and the gain is $990. The IRS taxes only that $990. It does not tax the $2,010 you already put in. This is why a record of what you paid matters as much as the sale itself.

Basis can change after you buy. Publication 551 says you must adjust the basis of stock for certain events after purchase. A related rule is the wash sale: if you sell at a loss and buy substantially identical stock within 30 days before or after the sale, you cannot deduct the loss right away. The new shares take the old basis, adjusted for the price difference, so the loss is not gone. It moves into the new shares.

In investing, basis is the starting point for every tax calculation on a sale. It also decides whether a sale counts as a gain or a loss. A gain on shares held for more than one year is a long-term capital gain, which is usually taxed at lower rates than pay. A sale within one year is short term. Your basis does not change the holding period, but it decides how big the gain is.

You report each sale on Form 8949. If you hold shares through a broker, the broker sends Form 1099-B with the proceeds and, for most stock, the basis too. Shares with a basis the broker has reported to the IRS are called covered securities. If the basis is missing or wrong, you enter the correct number yourself. The Form 8949 instructions show which box to use.

Shares in a private company rarely come with a broker statement. A broker rarely reports your basis for you, so the record is yours to keep. Save the option agreement, the exercise confirmation, the vesting statements and the tax forms your employer sends each year.

The starting basis depends on how the shares reached you. The table lists the common routes for employees and investors in private companies.

The spread, the gap between the share value and your exercise price, is the reason option basis confuses people. On a non-qualified stock option, the spread is taxed as income when you exercise, so it gets added to your basis. On an incentive stock option, the spread is not income for regular tax at exercise, but it can count for the alternative minimum tax. That tax runs a second calculation with different rules, and it gives you a second basis. ISO vs NSO explains the two types.

A restricted stock unit (RSU) is a promise of shares that you receive when they vest. The share value on that day is taxed as income and becomes your basis. See RSU taxes. If you buy shares that are still unvested, you can file a Section 83(b) election within 30 days. It sets your income and your basis at the date of purchase. Early exercise covers how that works.

If you invest through an SPV, a vehicle that pools investors’ money for one deal, you hold an interest in the vehicle and not the shares. When the SPV is taxed as a partnership, its yearly Schedule K-1 shows your share of income. Your basis starts with what you contributed, goes up with your share of income and goes down with distributions and losses. The IRS says you track this outside basis yourself, and the capital account on the K-1 cannot serve as that record.

An employee exercises 1,000 non-qualified options at a $2 exercise price when each share is worth $10. Fourteen months later, the shares sell for $25 each.

Now take the common mistake. If the employee reports the $2 exercise price as the basis, the gain looks like $23,000. That includes the $8,000 spread that was already taxed as income. The tax on that part is paid twice. If the shares had sold for $7 instead, the right basis of $10 gives a $3,000 loss. The wrong basis of $2 would have reported a $5,000 gain.

• Using the exercise price as the basisFor a non-qualified option, the spread taxed at exercise belongs in your basis. Leaving it out taxes the same income twice.
• Trusting a missing or low basisA broker or platform may show a basis of zero or only the price paid. Check it against your exercise and vesting records before you file.
• Losing the paperworkBasis for private shares is rarely reported to you. Keep option agreements, exercise confirmations, vesting statements and every Form 3921 you receive.
• Mixing up gift and inheritanceShares you receive as a gift keep the giver’s basis for a gain. Shares you inherit start at the value on the date of death. The two give very different gains.
• Buying back too fastRepurchasing the same stock within 30 days of a loss sale postpones the loss. It moves into the new shares’ basis.

Cost basis

What you paid for an investment, including fees, adjusted for later events. It is subtracted from the sale price to find the gain or loss.

Long-term capital gain

Profit on an asset held more than one year. It is usually taxed at lower rates than pay.

Wash sale

A loss sale followed or preceded within 30 days by a purchase of the same stock. The loss is postponed.

Non-qualified stock option

An option whose spread at exercise is taxed as income. That spread is added to your basis.

Incentive stock option

An option with no regular income tax at exercise if holding rules are met. It can trigger the alternative minimum tax.

Restricted stock unit

A promise of shares that vest later. The value at vesting is taxed as income and becomes the basis.

Section 83(b) election

A choice, filed within 30 days of buying unvested shares, to be taxed on their value now.

Figures were last checked on October 13, 2026. Rules are US federal and apply to tax year 2025 and later unless noted. The worked example is illustrative arithmetic. State taxes are not covered.