Cost Basis

If shares were acquired for $1,000 and later sold for $1,400, the $1,000 is the cost basis and the $400 is the gain. That is the simple case, and brokerages track it automatically, printing it beside each position on the account screen.

It gets more involved when the same company was acquired in several batches at different prices. There is then more than one possible basis, and the method used to pick one, first in first out or an average or specific identification, changes the reported gain on a partial sale. Brokers apply a default that can usually be changed, and it matters only at the moment of a sale.

Some events adjust it with no money moving at all. A stock split multiplies the share count and divides the basis per share to match, leaving the total untouched. Reinvested dividends add to it, because that cash was already taxed once and adding it to the basis is what stops it being taxed a second time.