The adjusted cost basis for a stock is what you actually have invested in the position after accounting for everything that has happened since you bought it: the original purchase price, the fees you paid, every reinvested dividend, any return of capital, stock splits, spin-offs, mergers, and any wash sale adjustments. When you sell, you subtract that adjusted figure from your net proceeds to arrive at a capital gain or loss. Get the number right and you pay tax on the real profit. Get it wrong and you either overpay the IRS or underreport income and invite penalties.
What Your Starting Basis Includes
Your initial basis is the total cost to acquire the shares, including every fee attached to the trade. Buy 100 shares at $50 and pay a $6.95 commission, and your starting basis is $5,006.95, not $5,000. The trade confirmation from your broker is the primary record, showing share price, trade date, and fees.1Internal Revenue Service. Topic No. 703, Basis of Assets
Smaller charges belong in the basis too. The SEC transaction fee, transfer fees, and any other regulatory charges at purchase all count. On a single trade the amounts are small, but leaving them out understates basis and overstates the taxable gain when you eventually sell.2Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
Events That Adjust Basis While You Hold the Stock
The word “adjusted” is doing real work. Once you own the shares, several kinds of events change the basis you started with. Some raise it, some lower it, some redistribute it across two or more securities.
Reinvested Dividends
In a dividend reinvestment plan, your cash dividends buy additional shares instead of landing in your account. Each reinvestment is a fresh purchase with its own basis equal to the price paid for the new shares. Your total basis rises with every reinvestment, and each lot can have a different per-share basis. Missing these purchases is one of the most common cost basis mistakes, because the dividend was already reported as income the year it was paid. Ignore the reinvestment and you’ll pay tax on that same money a second time when you sell.3Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
Return of Capital
A return of capital distribution isn’t income in the ordinary sense. The company is handing back part of what you invested, so the IRS requires you to reduce your basis by the amount you receive. The distribution itself isn’t taxable until it exceeds your remaining basis, at which point the excess becomes a capital gain. Brokers report these amounts in Box 3 of Form 1099-DIV.4Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.)
Stock Splits and Reverse Splits
A split changes the share count without changing the total value of the position. In a 2-for-1 split, 100 shares become 200, and a $60 per-share basis becomes $30. The total basis stays at $6,000. Reverse splits run the other way: fewer shares, higher per-share basis, same total. Neither is a taxable event.5Internal Revenue Service. Stocks (Options, Splits, Traders)
Mergers and Spin-Offs
When a company spins off a division, you generally receive shares in the new entity, and your original basis is split between the parent and the spin-off based on relative market values on the distribution date. The parent or its transfer agent typically publishes the allocation ratio. A stock-for-stock merger works the same way: your old basis transfers to the new shares under the exchange ratio. These adjustments are required by law, and a bad allocation distorts your gain or loss on both securities for as long as you own them.6Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis
Wash Sales
Sell a stock at a loss and buy a substantially identical security within 30 days before or after the sale, and the IRS disallows the loss. The disallowed amount doesn’t vanish; it’s added to the basis of the replacement shares, deferring the deduction rather than killing it. The 30 days runs in each direction, so the danger zone is really 61 days. Automatic recurring buys are a frequent trap: a scheduled purchase can trigger a wash sale you didn’t plan on, and brokers don’t always track the interaction across accounts held at different firms.7Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses – Section: Wash Sales
Which Shares Did You Actually Sell
Selling part of a position raises a separate question: which specific shares came out of the account. The answer changes your basis and your tax bill.
The IRS default is first-in, first-out. Your oldest shares are treated as sold first. If you bought 100 shares in January at $40 and another 100 in March at $55, and then sold 100 in December, FIFO uses the $40 basis. To sell the higher-cost lot instead, you use specific identification, which means telling your broker before or at the trade which lot to sell.2Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
Mutual fund shares get a third option: average cost. You divide total cost by total shares to get one per-share basis. It’s simpler when you have dozens of tiny reinvestment lots, but once you elect it for a particular fund, every share of that fund uses the same method.8Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.)
Special Rules for Inherited, Gifted, and Employer Stock
Inherited Stock
Stock you inherit generally receives a stepped-up basis equal to its fair market value on the date of the previous owner’s death, regardless of what they originally paid. If a parent bought shares for $10,000 that were worth $150,000 at death, your basis is $150,000, and the lifetime appreciation escapes capital gains tax entirely.9Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent If the executor files an estate tax return and elects the alternate valuation date six months after death, that value becomes your basis instead. Inherited stock is automatically long-term when you sell, no matter how briefly you held it.
Gifted Stock
Stock received as a gift usually takes the donor’s basis. If an uncle bought shares for $5,000 and gave them to you when they were worth $20,000, your basis is $5,000, and you’ll owe capital gains tax on the full appreciation when you sell. There is a dual-basis rule if the shares had already lost value at the time of the gift: you use the donor’s basis to figure a gain but the fair market value at the gift date to figure a loss, and if the sale price falls between the two, you report neither.10Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
RSUs and Stock Options
Restricted stock units are where employees most often overpay. When RSUs vest, the fair market value of the shares that day is reported as ordinary wage income on your W-2, and that same value is your basis. Vest 200 shares at $75 and your basis is $15,000; you only owe capital gains tax on appreciation above $75 when you later sell. Some brokers report $0 basis on Form 1099-B for these shares. If yours does, correct it on your return or you’ll pay tax twice on the same income.11Internal Revenue Service. Instructions for Form 1099-B (2026)
With incentive stock options, your basis starts at the exercise price you paid. If you hold at least two years from the grant date and one year from exercise, the entire gain above the exercise price is a long-term capital gain. Sell earlier in a disqualifying disposition and the spread between exercise price and fair market value at exercise becomes ordinary income on your W-2, which then increases your basis. ISOs also carry an AMT adjustment at exercise that effectively raises your basis for AMT purposes.
Covered Versus Non-Covered Shares
Whether your broker has to report your basis to the IRS depends on when you bought the stock. Shares purchased on or after January 1, 2011 are covered securities: the broker tracks basis and reports it on Form 1099-B. Shares bought before that date are non-covered; the broker sends basis information only to you, if at all, and the accuracy is on you.11Internal Revenue Service. Instructions for Form 1099-B (2026)
Non-covered shares often have gaps, especially after decades of splits, reinvestments, and corporate actions. If you can’t document a basis, the IRS effectively treats it as zero, and the whole sale price becomes taxable gain. Reconstructing the record before you sell is much easier than arguing about it after the fact.
How the Number Turns Into a Tax Bill
Sale proceeds minus adjusted basis equals your capital gain or loss. Proceeds mean the sale price net of any commissions or fees you paid to exit.
How the gain is taxed depends on the holding period. Held one year or less, it’s short-term and taxed at ordinary income rates. Held longer than a year, it’s long-term and taxed at 0%, 15%, or 20% depending on your taxable income. For 2026, single filers pay 0% up to $49,450 of taxable income, 15% up to $545,500, and 20% above that. Married joint filers cross into the 15% rate at $98,900 and the 20% rate at $613,700.12Internal Revenue Service. Topic No. 409, Capital Gains and Losses Higher earners also owe the 3.8% net investment income tax on capital gains when modified adjusted gross income exceeds $200,000 single or $250,000 joint, pushing the top effective rate to 23.8%. Those NIIT thresholds are not indexed for inflation.13Internal Revenue Service. Topic No. 559, Net Investment Income Tax
Losses work in reverse. A net capital loss offsets capital gains dollar for dollar, and up to $3,000 of any remainder ($1,500 if married filing separately) reduces ordinary income each year. Anything still left carries forward indefinitely. An overstated basis produces a phantom loss the IRS’s matching system will eventually catch, so accuracy matters on both sides of the calculation.
You report the sale on Form 8949, splitting short-term and long-term transactions, and totals move to Schedule D of your Form 1040.14Internal Revenue Service. 2025 Instructions for Schedule D (Form 1040) If the basis on your 1099-B is wrong or missing, you still report the correct number and note the adjustment. Discrepancies flagged by the Automated Underreporter program can produce notices and accuracy-related penalties.15Internal Revenue Service. 20.1.5 Return Related Penalties
Records to Keep
Keep every document that supports your basis for at least three years after you file the return reporting the sale. That covers the ordinary audit window. Keep records seven years if you claim a loss for worthless securities, and six years if there’s any chance you underreported income by more than 25%.16Internal Revenue Service. How Long Should I Keep Records
For stock you still hold, the clock hasn’t started. Hold on to purchase confirmations, reinvestment statements, corporate action notices, and merger allocation documents for the entire holding period, then through the retention window after the sale. The burden of proving basis is on you, and losing the paper trail on a long-held non-covered position can be expensive.