Cost Basis

Cost basis is the purchase price plus commissions, adjusted over time for events like splits, return of capital and reinvested dividends. Gain on sale is the sale price minus that figure, which is why basis is the number that determines the tax rather than the price you remember paying.

Shares bought at different prices form separate tax lots. Selling without specifying a lot defaults to first in, first out, which sells the oldest and typically lowest-basis shares. Specific identification lets the lot be named at the time of sale instead, and brokers must record the choice when the trade is placed rather than afterward.

The consequence is that an identical sale can produce very different taxable gains. Reinvested dividends are the common trap here: each reinvestment creates its own lot with its own basis, and forgetting them means paying tax twice on the same money.