Adjusted cost basis is your original cost basis after tax events raise or lower it, such as reinvested dividends, capital improvements, stock splits, and depreciation. It is the number you subtract from your sale proceeds to figure a capital gain or loss, so it, not the price you paid, drives the tax you owe.
Adjusted cost basis is your original cost basis (what you paid plus commissions and fees) after certain events increase or decrease it (Source: IRS Pub 551, Rev. 12/2025). Improvements and reinvested dividends increase it; depreciation, return of capital, and casualty losses decrease it. When you sell, amount realized minus adjusted cost basis equals your capital gain or loss (Source: IRS Topic 409).
What is adjusted cost basis?
Adjusted cost basis is the amount of your investment in property for tax purposes after it is adjusted up or down for specific tax events (Source: IRS Pub 551, 12/2025). It starts as original cost basis, then changes while you hold the asset. When you sell, you subtract adjusted cost basis, not the original purchase price, from your proceeds.
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Original cost basis is generally what you pay to acquire an asset plus costs such as commissions and load charges (Source: IRS Pub 550, 2025). Adjusted cost basis reflects everything that changed your investment afterward. The same figure is also used to compute depreciation and casualty losses (Source: IRS Pub 551, 12/2025), though for most investors the practical use is capital gains reporting.
Adjusted cost basis vs. cost basis vs. purchase price
Purchase price is what you paid for the asset. Cost basis is that price plus acquisition costs like commissions, fees, and load charges. Adjusted cost basis is cost basis after later events change it (Source: IRS Pub 550, 2025). The three are rarely equal, and using the wrong one can overstate a taxable gain.
| Term | What it includes | Example (100 shares) |
|---|---|---|
| Purchase price | Price paid for the asset only | $1,000 |
| Cost basis | Purchase price plus commissions, fees, load charges | $1,010 |
| Adjusted cost basis | Cost basis after reinvestments, splits, improvements, depreciation | $1,010 plus later adjustments |
For real property, settlement costs such as legal fees, recording fees, surveys, and owner’s title insurance are added to basis, along with sales tax and installation for other property (Source: IRS Pub 551, 12/2025). Costs of acquiring an asset and placing it in service typically become part of basis.
What increases and decreases adjusted cost basis
Adjusted cost basis increases with capital improvements, reinvested dividends, and reinvested capital gains distributions. It decreases with depreciation, return of capital, casualty losses, and expenses you deducted (Source: IRS Pub 551, 12/2025). Stock splits do not change total basis; they spread it across more shares, lowering per-share basis.
| Increases adjusted cost basis | Decreases adjusted cost basis |
|---|---|
| Capital improvements to property | Depreciation and depletion deductions |
| Reinvested dividends (DRIP shares) | Return of capital distributions |
| Reinvested capital gains distributions | Casualty and theft loss deductions |
| Commissions and fees paid at purchase | Nontaxable corporate distributions |
| Disallowed wash-sale loss added to shares | Section 179 cost deductions |
Reinvested dividends are a common upward adjustment. When a dividend reinvestment plan buys more shares, the cost of those shares adds to your adjusted cost basis (Source: IRS Pub 550, 2025). Missing them causes many investors to report tax on gains they already paid tax on as dividends.
How to calculate adjusted cost basis
Adjusted cost basis is calculated by starting with original cost basis, adding every upward adjustment, then subtracting every downward adjustment (Source: IRS Pub 551, 12/2025). The formula is original cost basis plus additions minus reductions equals adjusted cost basis. Each tax lot carries its own basis, so the running total is tracked lot by lot.
- Start with original cost basis, meaning the purchase price plus commissions, fees, and load charges.
- Add every upward adjustment, such as reinvested dividends, reinvested capital gains distributions, and capital improvements.
- Subtract every downward adjustment, such as depreciation, return of capital, and casualty loss deductions.
- Keep a separate running total for each tax lot, since basis is tracked lot by lot.
Stock example. You buy 100 shares for $1,000 plus a $10 commission, a $1,010 cost basis. Over five years you reinvest $300 of dividends into more shares, so adjusted cost basis becomes $1,310. A later 2-for-1 split leaves total basis at $1,310 while cutting per-share basis in half.
Real estate example. You buy a rental for $300,000 plus $6,000 in capitalized settlement costs, a $306,000 starting basis. You add a $40,000 improvement and claim $25,000 of depreciation. Adjusted cost basis is $306,000 plus $40,000 minus $25,000, which equals $321,000.
Why adjusted cost basis matters for capital gains tax
Adjusted cost basis matters because it sets your taxable gain. Amount realized minus adjusted cost basis equals your capital gain or loss (Source: IRS Topic 409). A higher adjusted cost basis means a smaller gain and less tax. In 2026, long-term gains are taxed at 0%, 15%, or 20% depending on taxable income (Source: Rev. Proc. 2025-32).
The holding period sets the rate: hold more than one year for long-term rates (0%, 15%, or 20%), a year or less for short-term rates taxed as ordinary income (Source: IRS Topic 409). Higher-income sales may also meet the 3.8% net investment income tax (NIIT) for 2026.
| Filing status (2026) | 0% rate up to | 15% rate up to | 20% above |
|---|---|---|---|
| Single | $49,450 | $545,500 | Over $545,500 |
| Married filing jointly / surviving spouse | $98,900 | $613,700 | Over $613,700 |
| Married filing separately | $49,450 | $306,850 | Over $306,850 |
| Head of household | $66,200 | $579,600 | Over $579,600 |
Adjusted cost basis in special situations
Adjusted cost basis follows special rules for inherited assets, gifts, digital assets, and securities your broker did not track. Inherited property gets a step-up to date-of-death value (Source: 26 U.S.C. §1014), crypto sold after 2025 is reported on the new Form 1099-DA, and basis you cannot substantiate can be treated as zero (Source: IRS Pub 550, 2025).
Covered securities are ones your broker must track basis for: stock acquired after 2010, and fund and DRIP shares after 2011 (Source: Form 1099-B instructions). The broker reports basis in box 1e and disallowed wash-sale loss in box 1g. For noncovered lots you supply basis yourself on Form 8949.
For digital-asset sales a broker effects after 2025, it files Form 1099-DA and reports basis for covered digital assets (generally those acquired after 2025 and held in the same custodial account through sale) (Source: Instructions for Form 1099-DA, 2026). Crypto acquired before 2026, or moved in from an outside wallet, is noncovered, so you reconstruct basis from your own records.
Inherited securities generally receive a stepped-up adjusted cost basis equal to fair market value on the date of death (Source: IRS Pub 551, 12/2025; 26 U.S.C. §1014(a)). Gifted securities instead carry over the donor’s basis, with a special dual-basis rule when value has fallen below that basis at the time of the gift.
Retirement accounts track basis too. Nondeductible traditional IRA contributions create basis reported on Form 8606 and recovered tax-free on distribution (Source: Instructions for Form 8606, 2025). That after-tax basis affects how much of a Roth conversion is taxable, a factor to weigh alongside required minimum distributions in 2026 when planning how much to convert to a Roth.
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Frequently asked questions
How do you calculate adjusted cost basis?
Start with original cost basis (purchase price plus commissions and load charges). Add upward adjustments such as reinvested dividends and improvements, then subtract downward ones such as depreciation and return of capital (Source: IRS Pub 551, 12/2025). Tracked per tax lot, the result is what you subtract from sale proceeds.
What is the difference between cost basis and adjusted cost basis?
Cost basis is what you paid plus commissions, fees, and load charges (Source: IRS Pub 550, 2025). Adjusted cost basis is that figure after later events change it, such as reinvested dividends, improvements, splits, or depreciation. You subtract adjusted cost basis, not plain cost basis, when you sell.
What increases your adjusted cost basis?
Capital improvements, reinvested dividends, and reinvested capital gains distributions increase adjusted cost basis (Source: IRS Pub 551, 12/2025). Commissions and fees paid at purchase are included, and a disallowed wash-sale loss is added to replacement shares. A higher adjusted cost basis reduces the taxable gain when you sell.
What decreases adjusted cost basis?
Depreciation and depletion deductions, return of capital, casualty and theft loss deductions, and nontaxable corporate distributions decrease adjusted cost basis (Source: IRS Pub 551, 12/2025). Section 179 and other cost deductions also reduce it. A lower adjusted cost basis increases the taxable gain when you sell.
Do reinvested dividends increase cost basis?
Yes. When a dividend reinvestment plan uses dividends or capital gains distributions to buy more shares, the cost of those shares adds to your adjusted cost basis (Source: IRS Pub 550, 2025). Because you already paid tax on the dividend, counting it in basis prevents double taxation.
Is cost basis the same as purchase price?
Not exactly. Cost basis usually starts with purchase price but is often larger, because commissions, fees, and load charges are added for securities (Source: IRS Pub 550, 2025). For real property, certain settlement costs are also added. Adjusted cost basis then moves up or down while you hold the asset.
What happens if I don’t know my cost basis?
You can reconstruct it from old broker and transfer-agent statements, adding reinvested dividends and adjusting for splits, spin-offs, and mergers (Source: IRS Pub 550, 2025). Basis you cannot substantiate may be treated as zero, which increases the reported gain. Documenting adjusted cost basis before a sale often supports a more accurate result.
What is the cost basis of inherited stock?
Inherited stock generally takes a stepped-up adjusted cost basis equal to fair market value on the date of death, or the alternate valuation date if the estate elects it (Source: IRS Pub 551, 12/2025; 26 U.S.C. §1014(a)). This step-up can reduce the heir’s taxable gain on a later sale.
About the author
Craig Wear, CFP®, is the founder of Q3 Advisors, a registered investment adviser focused on retirement tax planning. His work centers on the tax mechanics of distributions, Roth conversions, and asset dispositions for households in and approaching retirement, including how cost basis and adjusted cost basis feed into capital gains reporting and year-by-year tax planning decisions.
