Quick Answer
Cost basis equals the purchase price plus any commissions or fees paid to acquire the security. Net proceeds on a sale equal the sale price minus commissions or fees. Both adjustments favor the taxpayer: a higher cost basis and lower net proceeds each shrink the taxable gain.
Cost basis is the foundation of every capital gains calculation. This section covers how cost basis is established when you buy securities, and how it changes when the same stock is purchased in more than one lot.
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.
What Should You Check on Exam Day?
- Commissions raise the cost basis on a purchase and lower net proceeds on a sale; both changes reduce the taxable gain
- If a question doesn't say which shares were sold, assume FIFO