What is Cost Basis or Tax Basis?
Cost basis or tax basis is the original price of an asset like stock, bonds, property, funds, etc. This also includes purchasing costs like commissions, buying expenses, shipping costs and purchasing taxes. This original value is also adjusted for any appreciation or depreciation in value (including stock splits, dividend yields, return on distributions, etc) of the property. For tax purposes, cost basis is used for the calculation of capital gains or capital losses. Capital gains/losses are calculated by taking the difference between cost basis and current market value.
Accurate calculation of cost basis is important for traders to accurately calculating their tax payments. This becomes more important if the trader reinvest his dividends and capital gain distributions instead of taking them in cash. If the trader reinvests his earnings he will get a higher tax basis and thus have to pay less tax.
For example the trader buys $10,000 worth stocks and reinvested $1,000 gained as dividend and capital gains on same instrument the trader will have an adjusted cost basis of $11,000. And if the current market value (sale price) of the total stock is $12,000, total capital gain will be $1000 ($12,000 - $11,000). But if the trader does not consider his reinvestments, then he will have a cost basis of $10,000 (original value) and will be paying for a capital gain of $2000 ($12,000 - $10,000).
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Accurate calculation of cost basis is important for traders to accurately calculating their tax payments. This becomes more important if the trader reinvest his dividends and capital gain distributions instead of taking them in cash. If the trader reinvests his earnings he will get a higher tax basis and thus have to pay less tax.
For example the trader buys $10,000 worth stocks and reinvested $1,000 gained as dividend and capital gains on same instrument the trader will have an adjusted cost basis of $11,000. And if the current market value (sale price) of the total stock is $12,000, total capital gain will be $1000 ($12,000 - $11,000). But if the trader does not consider his reinvestments, then he will have a cost basis of $10,000 (original value) and will be paying for a capital gain of $2000 ($12,000 - $10,000).
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by NobleTrading at
8:14 AM
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