What is cost basis?

What cost basis means in simple terms

Your cost basis is what you paid for an asset, plus any allowed costs tied to getting it. Think of it as your starting figure for tax when you later sell, exchange, or give away the asset. The price you get at sale gets compared to this amount, and that's what decides if you've got a gain or a loss for tax.

Some tax rules call it allowable costs (UK), others say basis (US), but the idea won't change much: what you paid counts. Your taxable gain is the amount you get from selling the asset, minus your cost basis, minus any selling costs.

Which costs can be added to cost basis

You can add most purchase costs that are directly about buying the asset, depending on the country's rules. Dealer commissions, exchange fees, and transfer fees are common examples. A few places let you add some costs of improving an asset, but hardly ever for gold or crypto.

Costs of selling, such as a fee for a sale, usually come off the sale price instead of being added to basis. Routine storage or insurance costs are usually not allowed. If you spent money that has nothing to do with the purchase (a trip to the shop, for instance), you can't add it. Keep receipts and check your country's actual guidance for details.

Suppose you sell gold bought with a dealer fee

Let's say you bought 2 ounces of gold for 4,000 euros, and that price included a 100 euro dealer fee. Later you sell those ounces for 4,600 euros, paying a 50 euro selling fee when you do so. You live in a country that counts buying fees in cost basis, so your basis is 4,100 euros.

Your taxable gain is 4,600 minus 50 (selling fee), then minus 4,100 (your cost basis), which leaves 450 euros. If buying fees were not allowed to count, the basis would be only 4,000 euros and the gain would be 550 euros. Gold’s price does move up or down quite a bit, so remember a drop in value could also mean a loss instead.

Cost basis for several purchases, gifts and inheritances

If you build up your holding with several buys at different prices, you need a way to split up your cost basis when you sell only part. Common approaches include first in, first out (FIFO) or average cost. You'll find more detail in the FIFO, LIFO and HIFO methods article, and in some countries, the law picks the method you must use.

If you receive gold (or another asset) as a gift or inheritance, special rules set the basis. In some countries, you get the asset with the giver’s old basis; in others, the value as of the gift or date of death is used. It's a good idea to check your local tax rules before you sell any inherited or gifted asset.

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