Cost Basis is the purchase price of an asset. For tax purposes, Cost Basis is used to determine Capital Gains or Losses. If the eventual sale price minus the cost basis is positive, the sale results in a Capital Gain. Otherwise, the sale results in a Capital Loss. Note that for mutual funds, capital gains are generated whether or not those gains are distributed to shareholders. A Short-term Gain or Loss is realized when an asset is held for one year or less. The IRS taxes Short-term Gains at the taxpayer’s Marginal Tax Rate; however, the IRS taxes Long-term Gains (holding period is greater than a year) more favorably than it taxes Short-term Gains.
