Cost Basis

Cost basis is the number used to figure out how much profit or loss you actually made on a trade, for tax purposes. In its simplest form, it is what you paid to acquire a security, including the purchase price and any commissions or fees tacked on at the time of purchase.

When you sell, your gain or loss is calculated by taking the sale proceeds and subtracting the cost basis. If a stock cost you more to buy than you sold it for once basis is factored in, you have a loss; if less, you have a gain. That gain or loss is what gets reported to tax authorities, not just the raw price difference between entry and exit.

The nuance that trips people up is that cost basis is not always just "price paid." If you buy the same stock at different prices over time, reinvest dividends, or deal with corporate actions like stock splits, spin-offs, or mergers, your basis has to be adjusted to reflect that history. Brokers track this automatically for most stocks now and report it on tax documents, but the accounting method used when you have multiple lots of the same stock (bought at different times and prices) can change which specific basis applies when you sell only part of your position.

For an active trader making dozens of trades a day, cost basis matters less moment-to-moment for decision-making and more at tax time, when every closed trade needs an accurate basis to calculate the correct gain or loss.