Cheat Sheet for cost basis:
- Cost basis is a fancy name for the price you originally paid for your stock.
- It is used to calculate the money you made or lost for tax purposes.
The cost basis is the original value you paid for an investment, adjusted for stock splits and dividends. So if you buy 10 shares of AAPL at $150 per share and pay an $8 trading commission, your cost-basis is 10x$150+$8=$1508.
When you sell your stock for a capital gain, you pay taxes on the gain:
what you sold it for–what you paid=capital gain or loss
When you sell some but not all of your stock, you need to know your cost-basis per share. In the example above, it’s $1508/10=$150.80. So, if you sell 3 shares, your cost-basis for those shares is (3)($150.80). Things can get interesting. If there’s a 4 for 1 stock split, you now have 40 shares, and your “split-adjusted” cost basis per share is $150.80/4=$37.70.
The good news is that starting in 2011, your brokerage firm must keep track of cost-based information for you. Learn more about cost-basis and other stock market lingo here.