Christopher S. Mulvaney,

Attorney and Counselor-at-Law

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THIS WEBSITE INCLUDES GENERAL INFORMATION & THE OPINIONS OF CHRISTOPHER S. MULVANEY. IT IS INTENDED TO STIMULATE A BASIS FOR QUESTIONS RELATED TO YOUR PARTICULAR FACTUAL CIRCUMSTANCES — BEFORE YOU ACT.  THIS WEBSITE DOES NOT CONSTITUTE LEGAL ADVICE. IF YOU WANT LEGAL ADVICE, PLEASE MAKE A ZOOM APPOINTMENT TO SPEAK WITH ME.

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Gonzaga University School of Law – Spokane, Washington – Class of 2002 – Cum Laude The Latin phrase “Deo patriae, scientiis, artibus” translates to “For God and country through sciences and arts”.  The initials A.M.D.G. on the seal of Gonzaga Law School stand for Ad Majorem Dei Gloriam, which is Latin for “For the Greater Glory of God” the Motto of the Society of Jesus (Jesuits): a Catholic religious order founded by St. Ignatius of Loyola.

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“Tact is the ability to describe others as they see themselves.”
– Abraham Lincoln

What is Cost Basis?

Cost basis is the amount you paid for an asset or investment for tax purposes, according to Investopedia. It’s your initial investment in an asset, which could be the purchase price of a stock, a mutual fund, real estate, or even a collectible item. 

Why is cost basis important?

Cost basis plays a critical role in determining your tax liability when you sell an asset. When you sell an asset, you calculate your capital gain or loss by subtracting the adjusted cost basis from the selling price. 

Adjusted Cost Basis:

Your cost basis isn’t always just the original purchase price. It can be adjusted for various factors throughout your ownership of the asset. 

Factors that can affect your cost basis:

Increases to basis: 

• Capital improvements: Significant renovations or additions that increase the value of the property.
• Commissions and fees: Costs incurred during the purchase of the asset, like brokerage fees.
• Reinvested dividends or capital gains: If you reinvest dividends or distributions from an investment, they increase your cost basis because you are essentially buying more shares.
• Certain legal fees: Costs associated with defending or perfecting title to property. 

Decreases to basis: 

• Depreciation: If you’ve used the asset for business or investment purposes, you may have taken depreciation deductions, which reduce your cost basis.
• Casualty losses: Insurance payments received for damage or loss to the property. 

How to calculate cost basis:

• Stocks and bonds: Generally, your cost basis is the purchase price plus commissions and fees.
• Real Estate: Includes the purchase price, closing costs, and cost of capital improvements, minus any depreciation or insurance payments received.
• Inherited Assets: Your cost basis is usually the asset’s fair market value at the time of the original owner’s death.
• Gifted Assets: Your cost basis is generally the same as the donor’s adjusted cost basis, unless the fair market value at the time of the gift is lower. 

Methods for calculating cost basis:

• First-In, First-Out (FIFO): Assumes the first shares purchased are the first shares sold.
• Average Cost: Used primarily for mutual funds; calculates the average cost of all shares owned.
• Specific Shares Identification: Allows you to choose which specific shares to sell, potentially minimizing capital gains. 

Important Notes:

• Accurately tracking your cost basis is crucial for proper tax reporting.
• Brokerage firms often report cost basis information to the IRS and to you on Form 1099-B.
• If you have complex investments or tax situations, it’s recommended to consult with a tax professional. 

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