Cost Basis
What you paid for an asset (plus adjustments) — the figure gains and losses are measured against when you sell, gift, or bequeath it.
Basis determines your taxable gain when you sell: proceeds minus basis. It gets adjusted by reinvested dividends, return of capital, wash sales, and corporate actions, so the number your broker reports on a 1099-B can differ from a true average-cost calculation. Getting basis right across custodians is the foundation under TLH, NUA, and any gain-harvesting decision.
The number your gain is measured against
Cost basis is what you paid for an asset, and your taxable gain on sale is simply proceeds minus basis. Get the basis wrong and every downstream tax decision — what to harvest, what to gift, what to hold for a step-up — is built on a bad number. It's the quiet foundation under most tax planning.
What adjusts it over time
Basis rarely stays at the purchase price. Reinvested dividends add to it, return-of-capital distributions reduce it, a disallowed wash-sale loss gets rolled into it, and corporate actions like splits and spinoffs reallocate it. Brokers track basis on “covered” securities and report it on a 1099-B, but for older “noncovered” lots, transfers between custodians, and inherited assets, the reported figure can be missing or wrong.
How Formation handles it
Formation consolidates basis across custodians so the figure behind a harvesting or gifting decision reflects every lot, not just what one broker happens to report. Where the broker's 1099-B basis and a true average-cost view can differ, Formation flags it rather than papering over it — because an honest basis number is the point.
A worked example
You bought a fund for $50,000 and reinvested $8,000 of dividends over the years. Your basis is $58,000, not $50,000 — so a sale at $70,000 is a $12,000 gain, not $20,000. Miss the reinvested dividends and you'd overpay tax on $8,000 of phantom gain.
Frequently asked
What's the difference between covered and noncovered securities?
Covered securities (generally bought after 2011 for stocks, 2012 for funds) have basis the broker must track and report on your 1099-B. For noncovered lots — older holdings, transfers, inherited shares — basis reporting is your responsibility, which is where errors creep in.
Why does my broker's reported basis differ from my own calculation?
Brokers often default to a specific lot-accounting method and may not have basis for transferred or inherited shares. Wash-sale adjustments, return of capital, and corporate actions can also differ between the broker's records and a consolidated cross-custodian view.
See this in your own numbers.
Formation organizes your whole household by entity and cites every figure to its source — the context that makes terms like this actionable.
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