Cost basis is the amount you invested in an asset for tax purposes, usually the price you paid plus costs like commissions. When you sell, you pay tax only on the difference between your sale proceeds and your cost basis. Track your cost basis well and you report the right gain, without paying tax twice on the same money. At Nexus United Inc., our tax team in Delray Beach sees basis mistakes every filing season, and most of them are easy to prevent.
Basis matters more in 2026 than ever. Brokers send your cost basis to the IRS on Form 1099-B for most stocks and funds. For crypto bought on or after January 1, 2026, many platforms must also report basis on the new Form 1099-DA. When your return does not match what the IRS has, or the broker field is blank, you can owe tax on money you already paid tax on.
What Is Cost Basis?
The IRS defines basis in Publication 551 as the amount of your investment in property for tax purposes. It is the starting point for figuring gain or loss on a sale. It also drives depreciation, amortization, depletion and casualty loss deductions.
Cost basis = Purchase price + Commissions and fees
Adjusted basis = Cost basis + Increases (such as reinvested dividends and improvements) – Decreases (such as depreciation and return of capital)
Gain or loss = Amount realized (sale price – selling costs) – Adjusted basis
Here is a quick example. You buy 10 shares at $20 each and pay a $10 commission. Your cost basis is $210. Later you sell all 10 shares for $400 and pay a $10 fee, so you receive $390. Your taxable gain is $180, not $400.
What Is Included in Cost Basis?
Your starting basis usually includes:
- The purchase price of the asset
- Broker commissions and transfer fees
- Legal, title and recording fees on real estate
- Dividends and capital gain distributions you reinvested
- Capital improvements to a home or rental, such as a new roof or kitchen
Routine repairs do not count. Painting a room or fixing a leak keeps the property in shape, but it does not add to basis. If you own a home, read our guide on why you should be keeping home improvement records, since those receipts can cut your taxable gain when you sell.
How You Got the Asset Changes Your Basis
The IRS uses different basis rules depending on how the asset came to you.
| How you got it | Your starting basis | Holding period |
|---|---|---|
| Bought it | Purchase price plus costs | Starts the day after you buy |
| Gift | Donor’s basis for gains; lower of donor’s basis or fair market value (FMV) for losses | Usually includes the donor’s holding period |
| Inheritance | FMV on the date of death (or alternate valuation date) | Always long term |
| Divorce transfer | Your former spouse’s basis carries over | Includes your former spouse’s holding period |
| Stock received as pay (RSUs, bonus shares) | FMV that was taxed as wages | Starts when the shares vest |
Gift Basis and the Dual Basis Rule
When someone gives you an asset, you generally take over their basis. There is a twist when the asset lost value before the gift. In that case, you use the donor’s basis to figure a gain and the FMV on the gift date to figure a loss.
Say your aunt bought stock for $10,000 and it was worth $7,000 when she gave it to you.
- You sell for $12,000: your gain is $2,000, using her $10,000 basis.
- You sell for $5,000: your loss is $2,000, using the $7,000 FMV.
- You sell for $8,000: you have no gain and no loss.
If the donor paid gift tax, part of that tax may be added to your basis. Ask the donor for purchase records when you receive the gift, because they are much harder to find years later. The annual gift tax exclusion is $19,000 per person in 2026.
Inherited Basis and the Step-Up
Inherited assets usually get a step-up in basis to their FMV on the date of death. If your father bought stock for $5,000 and it was worth $50,000 when he died, your basis is $50,000. You pay tax only on growth after that date, and any gain is long term no matter how soon you sell.
A few points to watch:
- The executor may choose an alternate valuation date six months after death. Your basis then follows that value.
- If the estate filed an estate tax return, your basis must match the value reported to the IRS. The executor gives heirs this value on Schedule A of Form 8971.
- Assets in an irrevocable grantor trust that are not part of the taxable estate do not get a step-up, under IRS Revenue Ruling 2023-2.
- The federal estate tax exemption is $15 million per person in 2026, so most families owe no estate tax. The step-up still applies to them.
Divorce Transfers
Assets moved between spouses, or between former spouses as part of a divorce, keep their original basis. No tax is due at the time of transfer. The spouse who keeps a low basis asset also keeps the future tax bill, so compare after tax values, not just account balances, when you split property.
Events That Adjust Your Basis After You Buy
Basis is not frozen on the day you buy. Your adjusted basis moves up or down with certain events.
| Event | Effect on basis |
|---|---|
| Reinvested dividends | Increases basis by the amount reinvested |
| Stock split | Total basis stays the same; basis per share drops |
| Reverse split | Total basis stays the same; basis per share rises |
| Return of capital (Form 1099-DIV, box 3) | Reduces basis; amounts above zero basis become capital gain |
| Wash sale | Disallowed loss is added to the basis of the replacement shares |
| Spin-off or merger | Basis is split between old and new shares using the company’s Form 8937 |
| Home or rental improvements | Increases basis |
| Depreciation on rental or business property | Reduces basis |
| Casualty loss or insurance payout | Reduces basis |
Reinvested dividends are the most common missed adjustment. You already paid tax on those dividends in the year you received them. If you forget to add them to basis, you pay tax on them again when you sell.
Covered vs Noncovered Securities
Brokers must report cost basis to the IRS only for covered securities. For everything else, the burden is on you.
| Asset type | Covered if acquired on or after |
|---|---|
| Stocks | January 1, 2011 |
| Mutual funds, ETFs and dividend reinvestment plan shares | January 1, 2012 |
| Most bonds and options | January 1, 2014 |
| Digital assets held at a custodial broker | January 1, 2026 |
Shares moved from another firm, old paper certificates and crypto moved in from a private wallet are often noncovered. Your Form 1099-B or 1099-DA may show the sale proceeds but leave the basis box blank. A blank box does not mean zero basis. You still report your real basis on Form 8949.
FIFO, Specific Identification and Average Cost
When you sell part of a position, the method you use decides which shares you sold.
- First in, first out (FIFO): the default. Your oldest shares are sold first.
- Specific identification: you pick the exact lots. You must tell your broker at the time of the sale, not at tax time.
- Average cost: allowed for mutual funds and dividend reinvestment plan shares.
Here is how much the choice can matter. You bought 100 shares at $10 in 2020 and 100 more at $40 in 2024. In 2026 you sell 100 shares at $50.
| Method | Shares sold | Basis | Gain |
|---|---|---|---|
| FIFO | 2020 lot | $1,000 | $4,000 |
| Specific identification | 2024 lot | $4,000 | $1,000 |
Both gains are long term in this case. Specific identification still cuts the taxable gain by $3,000 this year.
Holding Period and 2026 Capital Gains Rates
Your basis sets the size of the gain. Your holding period sets the rate. Assets held one year or less create short term gains taxed as ordinary income. Assets held more than one year qualify for long term rates.
| 2026 long term rate | Single taxable income | Married filing jointly |
|---|---|---|
| 0% | Up to $49,450 | Up to $98,900 |
| 15% | $49,451 to $545,500 | $98,901 to $613,700 |
| 20% | Over $545,500 | Over $613,700 |
Higher earners may also owe the 3.8% net investment income tax. Florida has no state income tax, so residents here pay only the federal tax on capital gains.
What Happens If You Cannot Prove Your Basis?
If you cannot show your basis, the IRS can treat it as zero. That turns your full sale price into a taxable gain. A mismatch between your return and a broker form is also a common trigger for an IRS notice. If that happens, our guide on what to do if you receive an IRS CP2000 letter walks you through the response.
You can often rebuild missing basis from:
- Old brokerage or transfer statements
- Your broker’s cost basis tool or archived trade confirmations
- Historical price data for the purchase date
- Estate appraisals or Form 8971 for inherited assets
- Company Form 8937 filings for splits, spin-offs and mergers
A Simple Basis Recordkeeping Checklist
Keep basis records for as long as you own the asset. Then keep them at least three more years after you file the return that reports the sale, and longer in some cases. Our article on how long the IRS can audit you explains when those deadlines stretch to six years or more.
- Save every trade confirmation and year end brokerage statement
- Track reinvested dividends each year
- Store gift letters with the donor’s basis and purchase date
- Keep date of death values and appraisals for inherited assets
- File receipts for home and rental improvements
- Record wallet to wallet crypto transfers with dates and amounts
- Choose a lot method before you sell, and confirm it with your broker
Basis planning pairs well with tax loss harvesting. Selling losers to offset gains can lower your bill, as long as you avoid the wash sale rule. See our year-end tax planning guide for timing tips before December 31.
How Nexus United Inc. Can Help
The licensed tax professionals at Nexus United Inc. help individuals and small business owners in Delray Beach, West Palm Beach and across Palm Beach County report investment sales correctly. We reconcile broker forms, rebuild missing basis, review inherited and gifted assets, and plan sales to keep more of your gain. Call (855) 639 8740 or contact our team before you sell a large position.
Frequently Asked Questions About Cost Basis
What is the difference between cost basis and adjusted basis?
Cost basis is what you paid, plus purchase costs. Adjusted basis is that number after changes such as reinvested dividends, improvements, depreciation or return of capital. You use adjusted basis to figure your gain or loss.
Do I pay tax twice on reinvested dividends?
Only if you forget to add them to your basis. You pay tax on dividends in the year you receive them. Adding the reinvested amount to basis keeps you from paying tax on that money again when you sell.
What is the cost basis of inherited stock?
It is usually the fair market value on the date the owner died. This step-up wipes out the gain built up during their lifetime. Any later gain counts as long term, even if you sell right away.
What should I do if my Form 1099-B shows no cost basis?
A blank basis box means the broker did not report it, not that your basis is zero. Find your real basis from old statements or prior brokers and report it on Form 8949. Keep proof in case the IRS asks.
How do I find the cost basis of very old stock?
Start with old statements, transfer records and the company’s investor relations office. Historical price data for the purchase date can fill gaps. A tax professional can help you document a reasonable estimate.
Does crypto have cost basis reporting in 2026?
Yes, for many investors. Custodial platforms must report basis on Form 1099-DA for digital assets bought on or after January 1, 2026 and held in the same account. You must still track basis for older coins and assets moved between wallets.