Cost basis doesn't equal performance | Vanguard (2024)

FAQs

Does cost basis affect performance? ›

For this reason, cost basis should be used to calculate capital gains or losses for tax filing purposes only—not to measure investment performance.

Your sales proceeds and cost basis on your 1099-B may be much higher than your portfolio's earnings or balance was at any given time, because these proceeds represent the total amount of cash proceeds from the sale of securities, even if said proceeds were then used to buy securities again.

The bottom line is that the IRS expects you to maintain records that identify the cost basis of your securities. If you don't have adequate records, you might have to rely on the cost basis that your brokerage firm reports—or you may be required to treat the cost basis as zero, which could mean owing more in taxes.

Cost basis is the original value of an asset for tax purposes—usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions. This value is used to determine the capital gain, which is equal to the difference between the asset's cost basis and the current market value.

But here's what really happens: When the distribution is reinvested, it's added to your cost basis. Although the money was "earned" on the original investment by way of a distribution, it's not considered part of the investment's performance.

Any time you sell an investment, you'll look at the difference between the current market value and your cost basis to determine whether you've had a gain or a loss on the sale. A lower cost basis means you'll recognize a bigger gain, and a higher cost basis means you'll recognize a loss or simply a smaller gain.

The IRS expects taxpayers to keep the original documentation for capital assets, such as real estate and investments. It uses these documents, along with third-party records, bank statements and published market data, to verify the cost basis of assets.

If the cost basis information that is reported on your Form 1099-B is incorrect, you can report a correction to the IRS using Form 8949.

First-in, first-out method (FIFO)

This is the default for all investments other than mutual funds. Method implications: Because asset prices tend to rise over time, using FIFO as your cost basis method will have the oldest shares sold first, and those shares will often have the lowest cost basis.

Can I estimate my cost basis? ›

To calculate the equity cost basis for a non-dividend-paying stock, you add the purchase price per share plus fees per share. Reinvesting dividends increases the cost basis of the holding because dividends are used to buy more shares.

Definition of Cost Basis

The calculation is simply the net amount received from the sale of shares less the cost basis of those shares. If the result is a positive number, then you have a taxable gain. If the figure is negative, then you have a loss.

Cost basis matters because it's the starting point for any calculation of a gain or loss. If you sell an investment for more than its cost basis, you'll have a capital gain. If you sell it for less, it's a loss. Calculating your cost basis is generally pretty straightforward, but there are exceptions.

Here's how to determine the size of your profit when you sell: Calculate the total of everything you paid for the house - the original purchase price, fees and so on. Add to that the cost of all the improvements you have made over the years to get a grand total, which is known as the "adjusted cost basis."

No. You do not need to know the cost basis of a traditional IRA. In fact, the cost basis of a particular investment is never important for an IRA. There are, however, some situations in which the tax basis of your whole retirement account can be important.