The total cost basis is the amount of money that must be paid to secure and hold a specific investment. This amount is of crucial importance to investors at tax time because it will determine how much they have to pay in capital gains tax on their investment. Calculating total cost basis requires adding up the purchase price of the security in question, any dividends paid out to the investor, and any commissions paid to brokers for actions involving the security. Once this is done, this amount is subtracted from any profits made when the stock is sold to determine the amount of capital gains, which are taxable, earned by the specific investment.
Investors are always trying to buy low and sell high, because the difference between these two prices represents the profits that can be made from the stock market or other investment securities. At the same time, all of these profits are taxable income. For that reason, investors must understand just how much they need to report to tax officials in terms of capital gains earned from investments. Doing so requires understanding the concept of total cost basis.
Basically, the total cost basis is the amount that has been paid for a security, along with any other fees attached to it. These fees include any commission fees paid to brokers for their help in executing orders related to the security. Any dividends paid out on stocks would also be included, since they already counted as taxable income when originally yielded by the institution issuing the security.
As an example of how this works, imagine that an investor purchased shares of stock for $500 US Dollars (USD). The commission price paid to the stock broker for this action was $50 USD. After a year, the investor sold the stock, paying out another $50 USD in commission to the broker to do this. During the year he received one dividend payment of $100 USD. In this case, the total cost basis is $500 USD plus $50 USD plus $50 USD plus $100 USD, or $700 USD.
This amount is then set against the sale price of the security when the investor calculates his capital gains. Imagine that the investor from the example above received $800 USD from the sale of the stock. His capital gains for the investment would be $100 USD, which is the difference between $800 USD sale price and the $700 USD total cost basis. The $100 USD capital gains are the taxable income that must be reported.