What is basis price?
Basis price is the price used to figure out if you made or lost money on an investment. It is calculated by taking the price you paid for the investment and subtracting the price you sold it for. You also have to add in any fees or commissions you paid.
An example of basis price
Let’s say you buy a stock for $100. You also pay a $10 commission fee to your broker. Later, you sell that same stock for $150. To calculate your basis price, you would:
- Take the price you paid: $100
- Add the commission fee: $100 + $10 = $110. This is your cost basis.
- Take the price you sold for: $150
- Subtract your cost basis from the sale price: $150 – $110 = $40
In this example, your basis price is $110 and your profit is $40.
Why basis price matters
Basis price is important because it affects how much tax you might owe on your investment profits. In many countries, you have to pay capital gains tax when you sell an investment for more than your basis price.
Figuring out capital gains with basis price
Continuing with our earlier example, let’s say the capital gains tax rate is 20%. On your $40 profit, you would owe:
$40 profit x 20% = $8 in capital gains tax
If you did not account for the $10 commission in your basis price, you would calculate your profit as $50 instead of $40. Then you would end up paying more in taxes:
$50 profit x 20% = $10 in capital gains tax
So using the correct basis price ensures you pay the right amount of tax. It can save you money.
Different ways to calculate basis price
There are a few different ways to calculate basis price depending on how you acquired the investment.
Basis price for investments you bought
For investments you purchased, like in our example, the basis price is generally what you paid for the asset plus any commissions, fees, or other acquisition costs. This is known as your cost basis.
Basis price for inherited investments
If you inherited an investment, your basis price is usually the fair market value of the asset on the date of the original owner’s death. This is known as a stepped-up basis.
For example, let’s say your uncle bought stock for $50 many years ago. When he passes away, he leaves that stock to you in his will. On the date of his death, the stock is trading for $75. Your basis price for that inherited stock would be $75, not the $50 that your uncle originally paid.
Basis price for gifted investments
If you receive an investment as a gift, your basis price depends on whether you later sell it for a profit or a loss.
If you sell for a profit, your basis price is the same as the previous owner’s basis price. This is known as a carryover basis.
For example, let’s say your friend gives you stock that she bought for $200. Later you sell that stock for $250. Your basis price would be $200 (what your friend paid), not $0 (what you paid), and your taxable profit would be $50.
If you sell a gifted asset for a loss, the basis price reverts to the fair market value at the time of the gift.
Let’s change the previous example. Now imagine you sell the stock for $150 instead of $250. Since the sale price ($150) is less than your friend’s purchase price ($200), your basis price is the fair market value on the date your friend gave you the stock.
Other factors that affect basis price
The calculations we have discussed so far are simplified examples. Here are some other things that can impact basis price:
Stock splits and dividends
If a company splits its stock or issues dividends, this affects the basis price. Usually, the basis will be split proportionally.
For example, let’s say a company does a 2-for-1 stock split. If your basis in 100 shares was $50 per share pre-split, your new basis would be $25 per share post-split (but you would own 200 shares).
Capital improvements
For real estate investments like rental property, capital improvements you make can increase your basis price.
For example, if you buy a rental house for $200,000 and then spend $30,000 renovating the kitchen, your new basis price would be $230,000. This matters when you go to sell the property and calculate your taxable profit.
Depreciation
On the flip side, if you depreciate a real estate investment over time for tax purposes, this reduces your basis price. You must subtract the depreciation you claimed or could have claimed from your cost basis.
Let’s say you purchased a commercial building for $1 million. Over the years you depreciated it by a total of $200,000. When you sell the building, your adjusted cost basis would be $800,000 ($1 million cost – $200,000 deprecation).
