Cost basis
What you paid for an investment, in the eyes of the IRS — the starting point for calculating any gain or loss when you sell.
Cost basis is what you paid for an investment, adjusted for certain events, and it is the number the IRS starts from when you sell. Sale price minus cost basis equals the gain or loss reported for tax purposes.
A worked example. Buying 100 shares at $40 sets a cost basis of $4,000. Selling them later for $60 apiece produces $6,000 of proceeds and a $2,000 realized gain. If instead the shares were sold at $30, the result is a $1,000 realized loss.
Basis can shift. Reinvested dividends add to it. Return-of-capital distributions reduce it. Inheriting an investment usually resets basis to the market value on the date of death — the "step-up" basis. Brokerages track basis for most accounts and report it to the IRS on Form 1099-B, but errors happen, and older transferred positions sometimes arrive without basis attached. Basis matters most inside taxable brokerage accounts; it is not tracked the same way inside retirement accounts.
Plumb is financial education, not financial, investment, tax, or legal advice.