Cost basis

Cost basis is the taxpayer’s investment in an asset for computing capital gain or loss on sale. For directly purchased securities, basis is the purchase price plus commissions. For RSUs, basis is the FMV on the vesting date, which equals the wage income reported on the W-2. For NSOs, basis is the strike price paid plus the spread already taxed as wages. For inherited assets, basis is the FMV at the decedent’s date of death (step-up). Brokers report basis on Form 1099-B for covered securities, but RSU and ESPP adjustments often need manual correction by the taxpayer.

Example: an employee’s RSU vests deliver 300 shares at $180 FMV on the vesting date. Her 1099-B at a later sale shows basis of $0 because the broker only records her out-of-pocket cost. True basis is $180 per share, $54,000 total. If she sells at $200, the taxable gain is $6,000, not $60,000. She corrects this on Form 8949 with a code B adjustment.

Common mistake: accepting the broker’s $0 basis on RSU or ESPP shares without correction. This overstates gain and creates thousands in over-reported tax.

Cost basis matters at every sale, at every tax return with equity transactions, and at estate planning where step-up basis transforms after-tax outcomes.