What is cost basis?
You bought 10 shares of Company A for $1 each, plus a $1 commission
- Original cost = 10 x $1 + $1 = $11
- Cost Basis at this point is $11 (original cost + 0 since there are currently no tax related adjustments)
- Cost Basis per share is $1.10 (Total cost basis divided by number of shares).
Let's say Company A undergoes a corporate action, such as a 2 for 1 stock split.
- Instead of having 10 shares of Company A you now have 20 shares
- Instead of a $1.10 cost basis per share, your cost basis per share is $0.55
- Your total cost basis is still $11
Taxable gain or loss
Cost basis must be determined per share in order to calculate your taxable gain or loss on the sale of that share. This is especially important if you don't sell your entire position in Company A.