tax basis

Tax basis is the value of an asset used to calculate taxable gain when the asset is sold, transferred, or exchanged. It typically includes the purchase price plus related costs such as taxes, fees, and transportation. Over time, the basis can increase due to improvements or decrease due to deductions like depreciation. The adjusted basis is used to determine how much of a sale is taxable. For instance, if a company sells a building for $1.2 million with a basis of $1 million, only the $200,000 gain is taxed. If a business is purchased for $5 million and depreciates by $1 million, the adjusted basis becomes $4 million. Upon sale, tax is owed only on the amount above $4 million.

For most assets, the basis is the original cost, known as cost basis. This may include cash, debt, services, or other property used for the purchase. In the case of stocks or bonds, basis includes the purchase price plus commissions or transfer fees. Sometimes, basis is determined by fair market value or the previous owner's basis, such as in gifts or inherited property.

[Last reviewed in July of 2025 by the Wex Definitions Team] 

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