Cost Basis: Purchases

Cost basis is the foundation of every capital gains calculation. This section covers how cost basis is established when you buy securities.

Standard Cost Basis

The basic formula:

• Cost basis = purchase price + commissions/fees paid to acquire the security
• Net proceeds (on sale) = sale price - commissions/fees paid to sell
• Capital gain or loss = net proceeds - cost basis

Example:

• Buy 100 shares at $50/share + $10 commission = cost basis of $5,010
• Sell 100 shares at $60/share - $10 commission = net proceeds of $5,990
• Capital gain = $5,990 - $5,010 = $980

Key point: Commissions increase your cost basis (reducing taxable gains) and decrease your net proceeds. Both adjustments work in the taxpayer's favor.

Exam Tip: Gotchas

• Commissions affect BOTH sides of the trade. Add them to the purchase price (raising cost basis) and subtract them from the sale price (lowering net proceeds). Forgetting either one changes your gain calculation.

Multiple Purchases at Different Prices

When shares are purchased in multiple lots at different prices, the cost basis depends on which identification method the investor uses:

• FIFO (First In, First Out) (default): oldest shares sold first
• LIFO (Last In, First Out): newest shares sold first
• Specific identification: investor designates which shares to sell

These methods are covered in detail in the Cost Valuation Methods section later in this unit.