Basis (Cost Basis)

What it means

Your cost basis is the amount of money the government considers you to have invested in your stock. It is the starting point used to calculate whether you made a profit or a loss when you eventually sell your shares.

For most stock, the basis is simply the price you paid to buy it. However, with company stock plans, the rules change based on the type of grant you received. Because you may have already paid income tax on the value of these shares, knowing your correct basis prevents you from paying taxes on the same money twice.

A simple example

Imagine Sarah receives Restricted Stock Units (RSUs). When they vest (officially become hers), they are worth $1,000. Sarah pays income tax on that $1,000, so her cost basis becomes $1,000. A year later, she sells the shares for $1,200. Her profit is the $1,200 sale price minus her $1,000 basis, leaving her with a $200 gain to report on her taxes.

Why it matters to you

• If your basis is reported as too low, you will look like you made more profit than you actually did.
• An incorrect basis could lead you to pay more tax than you owe.
• Keeping track of this number ensures you only pay tax on your actual earnings.

Common mistakes to avoid

• Assuming your broker's 1099-B tax form is always correct; they often report a basis of $0 for stock awards.
• Forgetting to report the correct basis on Form 8949 when you file your tax return.
• A tax professional can help you adjust these numbers if you are confused.

Words used on this page

• Form 8949: An IRS form used to report the sale of stocks and other assets.
• Restricted Stock Units (RSU): A promise from your company to give you shares once certain conditions are met.
• Vesting: The moment a grant of stock officially belongs to you.
• 1099-B: A tax form from your broker that summarizes your stock sales for the year.