Finance Maxxing
Capital Gains & Investments
Cost Basis
Original purchase price used to calculate gain or loss.
Cost basis is the amount you paid for an asset, used to determine your gain or loss when you sell.
Basis Calculation Methods
| Method | How It Works | Best For |
|---|---|---|
| Specific identification | Choose which shares to sell | Tax optimization |
| FIFO (First In, First Out) | Oldest shares sold first | Default for most brokers |
| Average cost | Average of all share prices | Mutual funds |
Adjustments to Basis
| Event | Effect on Basis |
|---|---|
| Reinvested dividends | Increases basis |
| Stock splits | Adjusts per-share basis |
| Return of capital | Decreases basis |
| Wash sale disallowed loss | Added to replacement shares |
| Inherited assets | Steps up to FMV at death |
| Gifted assets | Donor's basis carries over |
Common mistake: Forgetting to include reinvested dividends in your basis, causing you to pay tax on them twice.
Sources
Related Terms
More in Capital Gains & Investments
Long-Term Capital Gains (LTCG)
Gains on assets held over one year, taxed at preferential rates.
Short-Term Capital Gains (STCG)
Gains on assets held one year or less, taxed as ordinary income.
Holding Period
How long you held an asset — determines LTCG vs. STCG.
Net Investment Income Tax (NIIT)
3.8% surtax on investment income for high earners.
Capital Loss Deduction
Losses offset gains; up to $3,000/yr against ordinary income.
Tax-Loss Harvesting
Selling investments at a loss to offset gains.
Wash Sale Rule
Disallows loss if you repurchase same security within 30 days.
Qualified Dividends
Dividends taxed at LTCG rates instead of ordinary rates.
Stepped-Up Basis
Inherited assets reset cost basis to date-of-death value.