What Is Cost Basis?
The original purchase price of an investment, used to calculate gains or losses.
The Full Definition
Cost basis is the original value of an asset for tax purposes — typically what you paid for it, including commissions. When you sell an investment, the difference between your proceeds and your cost basis determines your capital gain or loss. With dollar cost averaging, your cost basis is the average price paid across all purchases. Understanding your cost basis is important for tax planning and evaluating actual investment performance.
Real-World Example
You buy 10 shares at $50 and 10 more at $70. Your total investment is $1,200 and your cost basis is $60 per share. If you later sell at $80, your gain is $20 per share — not $30 (if you miscalculate using only the first purchase price).