Calculating the effect of cost basis on investment returns What exactley do they mean with the basis?
basis = historical cost
it says all else equal, a lower basis will mean a higher gain, higher capital gains tax…and a lower investment value. i understand, that it will be a lower futer investment value. but why a higher gain and higher capital gains tax? i dont see it in the formula…
Low basis = high capital gain. High capital gain = high realized capital gain tax High realized capital gain tax = lower after tax return What SS is this?
Capital Gain=Sale Price-Cost Basis hence the lower the basis the higher the cap gain.
adavydov7 Wrote: ------------------------------------------------------- > Capital Gain=Sale Price-Cost Basis > hence the lower the basis the higher the cap gain. That’s right, I tried to say it like that.
I love the confusing terminology basis = spot price minus future price
remember, the investment amount is not the same as cost basis. this is because if returns are reinvested, then the basis changes. basis is calculated as a % of the initial investment i.e. basis / investment is the factor that needs to go into the formula.
Basis is nothing more than all the after-tax money you have put into an investment. The idea is that you never get taxed on the same money twice. So in an traditional IRA, which you get a deduction for funding (and hence have never paid taxes on teh contributions) will have no basis. That is why everything you take out is taxed. It is reverse for a Roth IRA which is funded with after-tax dollars. So if you earn money at work, it gets taxed and you take home the net amount and then buy a stock (in a regular brokerage acct) - you are buying the stock with after-tax money. So you have basis in the investment to the extent of your contribution. With a mutual fund, even if you reinvest dividends you have to pay taxes on the dividends each year. So effectively it is the like the MF gave you cash, you paid taxes on it and then you choose to use the after-tax money to buy more of the same funds. Since you put more after-tax money into the fund your basis increases.
To add - The capital gain is the difference between your sale price and your basis. So you are only paying taxes on the GAIN. Not the part that has already been taxed once. This keeps the shady government from taxing you twice on the same dollar.
Does anyone have a real life exemple?
Other things affect the basis as well: depreciation, amortization, depletion, acretion, impairment, and improvement, to name a few.
You can think of the basis as the book-value-for-tax-purposes.