Investing term
What is Cost basis?
What you originally paid for a holding, used to calculate gains and losses when you eventually sell.
Cost basis is what you originally paid for a holding, including fees, and it's the number used to calculate your taxable gain or loss when you sell. Sell above your basis and you have a gain; sell below it, a loss. It's the anchor the whole tax calculation hangs on.
Keeping accurate basis matters most when you've bought the same investment at different prices over time, or reinvested dividends into more shares — each purchase adds to your basis. When you sell part of a holding, which shares (and which basis) count can change your tax bill, and reinvested distributions quietly raise your basis so you aren't taxed twice on them. Good records, or your broker's basis tracking, keep this straight. Tax rules vary by country.
Cost basis is what you paid — averaged across purchases. Selling at $70 on a $50 basis is a $20 taxable gain, not $70. Accurate basis (incl. reinvested dividends) means fair tax.
For example
You buy shares at $40 and later more at $60, averaging a $50 basis; selling at $70 gives a $20-per-share taxable gain, not the full $70.
Learn it by doing
That's Cost basis in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 8, Corporate Actions: What Lands in Your Account).
Try the free lesson →Why it matters to you
Cost basis matters because it directly determines your tax bill — your gain is the sale price minus the basis, so an accurate basis means you pay tax on the real profit, not more. It's easy to get wrong after reinvested dividends or multiple purchases, and overstating a gain (by forgetting reinvested amounts that raised your basis) means overpaying tax. Tracking basis carefully, or relying on your broker's records, is a quiet way to avoid handing over more than you owe.
⚠ Forgetting that reinvested dividends raise your basis
Each reinvested dividend buys shares with money that was already taxed as income, which adds to your cost basis. Investors who ignore this calculate their gain from the original purchase price alone and end up overstating the gain — paying tax twice on the same reinvested dividends. Track reinvestments, or use your broker's basis records, to avoid overpaying.