What is Cost Basis?

🖥️ Reading time: 2 minutes

Why is it Important?

🧐 Ever heard of cost basis but not sure what it means? Do you even need to care as an investor or options trader?

Simple Answer:

💰 Cost basis is the original price you paid for an investment.
📊 It’s important when selling stocks or options because it determines your capital gains or losses (aka how much you owe in taxes).

Do You Always Need to Track Cost Basis?

✅ No worries if you invest in a tax-advantaged account (like a Roth IRA)—you won’t owe taxes when selling.
⚠ In a taxable brokerage account? You’ll need to know your cost basis to calculate capital gains taxes when you sell.

👀 Not selling anytime soon? If you’re a buy-and-hold investor, cost basis won’t matter much until you sell.
🔥 Trading options? If you sell covered calls or cash-secured puts, cost basis plays a bigger role in your tax bill.

Methods for Calculating Cost Basis

🔢 Different cost basis methods impact how much tax you’ll owe:

📌 FIFO (First In, First Out) → First shares bought = First shares sold (default for most brokerages).
📌 LIFO (Last In, First Out) → Most recent shares are sold first.
📌 High Cost → Sells highest-cost shares first (lower gains, lower taxes).
📌 Low Cost → Sells lowest-cost shares first (maximizing capital gains).
📌 Tax Efficient → Strategically minimizes tax burden.
📌 Specific Lot Selection → You manually pick which shares to sell.

What’s the Best Strategy?

📊 FIFO is common (but could mean higher taxes if older shares were cheaper).
💸 Options traders may prefer "Low Cost" to maximize gains.
🔄 Long-term investors may prefer "High Cost" to keep lower-cost shares longer.

💡 Consistency is key. Choose a method and stick with it to avoid tax-time confusion! Not sure? Ask a tax pro. 

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Happy investing!
-Steve

Disclaimer:

The following article is strictly the opinion of the author and is not to be considered financial/investment advice. CTL Community LLC and the author of this article do not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.  "Call to Leap may earn affiliate commissions from the links mentioned. Call to Leap is part of an affiliate network and receives compensation for sending traffic to partner sites such as ImpactRadius, CardRatings, MyBankTracker, and more."