How is cost basis calculated?

Cost basis is the original price that an asset was acquired for, for tax purposes. Capital gains are computed by calculating the difference from the sale price to the cost basis. Several accounting methods exist to adjust the cost basis so that it is more favorable, but be careful to follow Internal Revenue Service (IRS) guidelines.

What is an adjusted cost basis?

An adjusted cost basis that includes deductions to the value of an asset can be particularly beneficial to investors or business owners when the sale results in a loss. These losses can be used to reduce taxable income up to a certain amount each year, and excess losses can be carried forward in future years.

How do I adjust the cost basis of an asset?

Legal fees associated with the purchase or sale of the asset, title fees, transfer fees, and sales tax all may be used to adjust the cost basis up. The owner of an asset may also use the costs associated with selling it to reach an adjusted cost basis.