Cost Basis - The cost of an investment. For financial assets (stock and bonds) the cost including transaction costs (commissions).
Real asset (for example, buildings), that can be depreciated, have the cost basis reduced by the depreciation taken.
In computing the taxable gain on a capital gain, take sales processed and subtract the cost basis (if the result is negative it is a capital loss.
Related Terms:
- Tax Loss Selling - selling an asset that is valued at less than the cost basis. Closing the position creates a taxable event. Therefore, stocks that have declined can come under selling pressure as investors decide to improve their tax situation (by reducing their income and therefore taxes) by selling those stocks.
- Capital Gain
- Depreciation - reduction in value of a real asset as time passes. The depreciation serve as a reduction in income (to reflect the loss of value of an asset) and therefore in taxes owed. However depreciation has no effect on cash flow - it is an accounting expense not a cash expense.
