Is cost basis always what I paid?

Not always. Basis generally starts with cost when property is purchased. When property is received by gift, basis is generally the donor's adjusted basis, and special rules can apply when the property's value has fallen. When property is inherited, basis is generally based on fair market value at the date of death, though exceptions exist, such as an alternate valuation date.

What can change my basis after I acquire property?

Certain tax events can increase, decrease, or reallocate basis. A capital improvement, such as a new roof or an addition, can increase basis. Tax depreciation, when applicable, can decrease basis. A stock split can reallocate basis across more shares without changing the total. Other events can apply depending on the property and the applicable rules.

What is adjusted basis?

Adjusted basis generally means the applicable basis after required tax adjustments. It is the number used to determine gain or loss when property is sold or exchanged.

Is adjusted basis the same as current value?

No. Purchase price is what you paid to acquire the property. Current value is what the property is worth today. Adjusted basis is the applicable basis after required tax adjustments. They are different concepts. Sometimes the numbers happen to match, but they do not have to.

PRISM 202

What Is Cost Basis?

Where basis starts — and how it changes.

PRISM 201 showed that sale proceeds and gain are not the same number. The number that separates them is basis. This lesson asks where that number comes from.

Basis is a tax measurement used to track your investment in property for purposes such as determining gain or loss. It often starts with what you paid. It does not always start there.

Basis is not always what you paid. It starts with how you acquired the property, and certain events can change it.

So the sequence has two steps. First, identify the applicable starting-basis rule based on how the property was acquired. Then look at what happened after you acquired it.

How did you get it?→ Starting-basis rule→ What happened afterward?→ Adjusted basis

PRISM 202 illustrated Cost Basis lesson explaining how acquisition method establishes starting basis and later tax events can change or reallocate adjusted basis. — Basis begins with an applicable starting rule based on how property was acquired. Later tax events can change or reallocate it.

What to Remember

Basis is a tax measurement used to track your investment in property for purposes such as determining gain or loss.

Basis is not always what you paid.

It starts with how you acquired the property.

Certain events can increase, decrease, or reallocate basis.

Purchase price, current value, and adjusted basis are different concepts.

How Did You Get the Property?

The same asset could start with a different basis depending on how it was acquired. That is why the first question is not “what is it worth?” but “how did you get it?”

Bought: Basis generally starts with your cost.
Gifted: Basis is generally the donor’s adjusted basis. Special rules can apply when the property’s value has fallen.
Inherited: Basis is generally based on fair market value at the date of death. Exceptions exist, such as an alternate valuation date.

What Happened Afterward?

Starting basis is only the beginning. Certain tax events can change or reallocate basis over time.

Capital improvementIncrease basis: For example, a new roof or an addition.
Tax depreciationDecrease basis: When applicable to the property.
Stock splitReallocate basis: For example, a 2-for-1 split spreads the same total basis across more shares.

These and other tax events can change or reallocate basis over time. Which adjustments apply depends on the property and the applicable rules.

A Simple Example

Suppose a property was purchased for $50,000, and a $10,000 capital improvement (a new roof) was later made.

$50,000 original purchase price
+ $10,000 capital improvement
= $60,000 adjusted basis

If the property is later sold for $80,000:

$80,000 amount realized
− $60,000 adjusted basis
= $20,000 realized gain

This is a simple example that assumes no selling costs or other adjustments. The point is not the size of the numbers. The improvement changed the basis, and that changed the gain.

Different Numbers. Different Jobs.

Purchase price ≠ current value ≠ adjusted basis. These are different concepts. Sometimes the numbers happen to match. They do not have to.

Purchase price: What you paid to acquire it.
Current value: What it’s worth today (market value).
Adjusted basis: The applicable basis after required tax adjustments, used to determine gain or loss.

Sale proceeds are a fourth number: what you receive when you sell. Gain is the result after subtracting adjusted basis from the amount realized.

What This Lesson Does Not Cover

Different assets and transactions can have special basis rules. PRISM 202 intentionally stops at the structure: find the applicable starting-basis rule, then track the events that can change it.

Records, forms, and missing basis raise bigger questions. Same principles, more detail.

Frequently Asked Questions

What is cost basis?: Cost basis is generally the tax measurement of your investment in property, used for purposes such as determining gain or loss. It often starts with what you paid, but the applicable starting-basis rule depends on how the property was acquired.
Is cost basis always what I paid?: Not always. Basis generally starts with cost when property is purchased. When property is received by gift, basis is generally the donor's adjusted basis, and special rules can apply when the property's value has fallen. When property is inherited, basis is generally based on fair market value at the date of death, though exceptions exist, such as an alternate valuation date.
What can change my basis after I acquire property?: Certain tax events can increase, decrease, or reallocate basis. A capital improvement, such as a new roof or an addition, can increase basis. Tax depreciation, when applicable, can decrease basis. A stock split can reallocate basis across more shares without changing the total. Other events can apply depending on the property and the applicable rules.
What is adjusted basis?: Adjusted basis generally means the applicable basis after required tax adjustments. It is the number used to determine gain or loss when property is sold or exchanged.
Is adjusted basis the same as current value?: No. Purchase price is what you paid to acquire the property. Current value is what the property is worth today. Adjusted basis is the applicable basis after required tax adjustments. They are different concepts. Sometimes the numbers happen to match, but they do not have to.

Go Deeper

Capital Gains
Why sale proceeds and gain are not the same number.
RSUs vs. ISOs
Where equity compensation lands in the ordinary and capital distinction.
What Is QSBS? Section 1202
A statutory exclusion that turns on the character of the gain.

Primary Sources

IRC §1012 — Basis of property—cost.
Provides the general rule that the basis of property is its cost, subject to applicable exceptions.
IRC §1015 — Basis of property acquired by gifts and transfers in trust.
Provides the general carryover-basis framework applicable to property acquired by gift.
IRC §1014 — Basis of property acquired from a decedent.
Provides the general rule tying basis of inherited property to value at the date of death, with applicable exceptions.
IRC §1016 — Adjustments to basis.
Provides the statutory framework for adjustments that increase or decrease basis over time.
IRS Publication 551 — Basis of Assets.
Provides IRS guidance on determining basis, adjusted basis, and basis of property acquired other than by purchase.

This material is for general educational purposes and does not constitute individualized tax advice. Tax treatment depends on the facts and circumstances, and specialized rules may apply.

More foundational concepts are published in Tax Code, Simplified.