Adjusted cost basis
Also: adjusted cost basis, adjusted basis, adjusted tax basis
The original cost basis of an asset modified for subsequent tax events: wage income reported on RSU vest or NSO exercise, return of capital distributions, wash-sale disallowed losses, and step-up at inheritance.
Adjusted cost basis is the starting cost basis modified by events that change the tax position of the asset. Upward adjustments include wage income on RSU vests and NSO exercises (already taxed as income), reinvested dividends already taxed, wash-sale losses rolled into basis, and AMT preference items on ISOs (creating an AMT-specific basis). Downward adjustments include return-of-capital distributions and depreciation on property. The adjusted basis, not the original purchase price, is what the taxpayer subtracts from sale proceeds to compute capital gain or loss.
Example: an employee exercised 1,000 ISOs at a $15 strike when FMV was $60. Regular basis is $15,000 (strike paid). AMT basis is $75,000 ($15,000 strike plus the $60,000 bargain element reported on Form 6251). If she sells for $90,000 in a qualifying disposition, regular gain is $75,000 long-term capital gain. AMT gain is $15,000, producing a negative $60,000 adjustment on Form 6251 that partially recovers the earlier AMT paid.
Common mistake: using the same basis for regular tax and AMT on ISO shares. They differ, and both must be tracked separately until sale.
Adjusted cost basis matters at every sale of equity compensation shares, at AMT credit calculations, and at estate tax basis reporting.