The Importance of Tax Basis for Tax Purposes

Tax basisTax basis is generally the amount of your capital investment in property for tax purposes. Use your tax basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange, or other disposition of the property.
Tax Basis as CostIn most situations, the tax basis of an asset is its cost to you. The cost is the amount you pay for it in cash, debt obligations, and other property or services. Cost includes sales tax and other expenses connected with the purchase. Your tax basis in some assets isn't determined by the cost to you. If you acquire property other than through a purchase (such as a gift or an inheritance), refer to Publication 551, Tax basis of Assets for more information. If you acquired your property from an individual who died in 2010, special rules may apply to your calculation of tax basis. Review Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010 PDF for more information.
Tax Basis Stocks or BondsIf you buy stocks or bonds, your tax basis is the purchase price plus any additional costs such as commissions and recording or transfer fees. If you have stocks or bonds that you didn't purchase, you may have to determine your tax basis by the fair market value of the stocks and bonds on the date of transfer or the tax basis of the previous owner. Refer to Publication 550, Investment Income and Expenses for more information.
Adjusted Tax BasisBefore figuring gain or loss on a sale, exchange, or other disposition of property, or before figuring allowable depreciation, you must determine your adjusted tax basis in that property. Certain events that occur during the period of your ownership may increase or decrease your tax basis, resulting in an "adjusted tax basis." Increase your tax basis by items such as the cost of improvements that add to the value of the property, and decrease it by items such as allowable depreciation and insurance reimbursements for casualty and theft losses.
For more information For more on tax basis and adjusted tax basis, refer to Publication 551 and the Instructions for Schedule D (Form 1040), Capital Gains and Losses.