Tax glossary

Cost Basis

Cost Basis — what it means, how it works, and a real example, explained without the jargon.

What is Cost Basis?

Cost basis is what you originally paid for an asset, plus certain add-on costs. It's the number you subtract from the sale price to figure your gain or loss.

How it works

For stock it's the purchase price plus commissions; for a home it's the price plus improvements. Reinvested dividends add to basis too. Get basis right and you don't overpay tax on money that was never really profit.

A quick example

You buy a home for $300,000 and add a $40,000 kitchen remodel. Your basis is $340,000, so selling at $420,000 is an $80,000 gain — not $120,000.

What people get wrong

Track improvements and reinvested dividends for years, not just the purchase price. Forgetting them is one of the most common ways people accidentally overpay capital-gains tax.

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Frequently asked questions

What does Cost Basis mean?

Cost basis is what you originally paid for an asset, plus certain add-on costs. It's the number you subtract from the sale price to figure your gain or loss.

How does Cost Basis work?

For stock it's the purchase price plus commissions; for a home it's the price plus improvements. Reinvested dividends add to basis too. Get basis right and you don't overpay tax on money that was never really profit.

What's the most common mistake with cost basis?

Track improvements and reinvested dividends for years, not just the purchase price. Forgetting them is one of the most common ways people accidentally overpay capital-gains tax.