Enter a search term.
line drawing document and pencil

File a claim

Need to file an insurance claim? We’ll make the process as supportive, simple and swift as possible.

Action Teams

If you want to make an impact in your community but aren't sure where to begin, we're here to help.
Illustration of stairs and arrow pointing upward

Contact support

Can’t find what you’re looking for? Need to discuss a complex question? Let us know—we’re happy to help.
Use the search bar above to find information throughout our website. Or choose a topic you want to learn more about.

What is cost basis & how does it work?

Woman signing papers
d3sign/Getty Images

As you find ways to invest your savings for your family's future—whether it's through stocks, property or life insurance—the concept of cost basis likely will come into play. It's how much you originally paid for an asset, and it can help you understand how much you've gained or lost. This figure also could affect your tax bill, depending on your gains, losses or if you plan to sell the asset.

In this article, we'll cover:

gold line

What is cost basis?

Cost basis often is described as the original price you paid for an asset. That's a good starting point, but it's not the only factor in the equation. For example, commissions, reinvested dividends and transaction costs typically increase your cost basis, while depreciation of your asset reduces it.

What is cost basis in investments?

For example, when you purchase a mutual fund share, you do so at a certain price. That price is the cost basis for that share.

If you plan to sell your asset, cost basis could directly impact your tax liability. When it comes time to investigate the capital gains or losses on an investment, you need to start with the cost basis to determine how much of a gain or loss you have to report on your income tax return when you sell a share.

So, if you have a share of stock or a mutual fund worth $50 and the cost basis is $20, then your gain is $30. If you sell that share, then you'll owe taxes on just that $30.

How to calculate an investment’s tax liability using cost basis

To determine your gains or losses, subtract your cost basis from your investment's current value. For example, if you have an investment now worth $25,000 with a cost basis (original price) of $15,000, then you have $10,000 worth of gains. If that same investment is only worth $10,000 now, then you have a $5,000 loss.

Calculating your cost basis can be more complex if you've accumulated shares at different times for different prices. When the original value of your shares differs and it comes time to sell them, you should assess the cost basis methods available to help decide which shares to sell first. The goal here is to choose which shares to sell strategically, so you can decrease your tax bill and have more money available to help reach your financial goals.

These are your calculation options:

  • Average cost. You can choose to add together the shares you've purchased, no matter when you purchased them. Then, you'd divide their value by your number of shares to determine the average cost basis per share. This can reveal how much you've gained or lost overall.
  • First in, first out. With the FIFO method, the first assets you bought are the shares you sell first.
  • Last in, first out. With the LIFO method, the last assets purchased are the first ones you sell.
  • High cost. You can choose to first sell the shares that had the highest cost per share when you purchased them.
  • Low cost. You can aim to first sell the shares that had the lowest cost per share when purchased.
  • Specific lot identification. You can select individual purchase lots to get your desired total sale amount when it comes time to sell them.
  • Loss/gain utilization. If your goal is to generate the least potential tax liability, you can group shares based on the amount of losses or gains they produced in the holding period (or how long you've owned them) when you go to redeem them.

Each of these methods has a different calculation formula. Here's an example of how to calculate cost basis for investments with the average cost method:

Say you have a $3,000 total cost basis of shares owned, and you own 100 shares. This is the formula you would use to get the average cost basis, which would result in $30 per share: $3,000 (total cost basis of shares owned) / 100 (total number of shares owned) = $30 (average cost per share)

Cost basis & long- vs. short-term gains

If you want to minimize your tax implications, it's important to keep holding periods in mind. How long you own shares can affect the tax rate you pay.

Short-term gains, which are gains on assets you've held for one year or less, are taxed as ordinary income. Gains on assets that you've held for longer than a year are considered long-term gains and are taxed at capital gains rates. When possible, holding appreciated assets for longer than a year can be a smart move since your tax liability will be lower.

As mentioned above, dividends reinvested into additional shares also have a cost basis and a holding period, so be sure to consider these factors as part of the decision on which shares to sell.

And remember, the less you spend on taxes, the more money you have available to support your personal and financial goals.


How capitals gains tax on investments works

The capital gains tax on investments comes into play when an investment's value increases between the time it is bought and the time it is sold. Understanding the ins and outs of this tax, including who pays the capital gains tax, can help you better manage investments.

Dive deeper

What is cost basis in life insurance?

Permanent life insurance contracts such as whole life contracts that accumulate cash value also have a cost basis. Part of each premium payment you've made over the contract's life goes toward that cash balance and is included in the cost basis. However, that cash balance also collects interest. That interest is not part of your cost basis.

Life insurance proceeds are generally not taxable to beneficiaries when you pass. Additionally, distributions taken from the cash value during the insured's lifetime also may be received income-tax free. If you take a partial withdrawal of the cash value up to the amount of your cost basis, you typically won't incur a tax bill because distributions are treated on a first-in, first-out basis. The money you withdraw is assumed to come first from the cost basis and then taxable gains.1,2

The sum of premiums you've paid is the starting point for determining the cost basis of a life insurance contract. However, cost basis also is affected by things like:

  • Prior withdrawals. These reduce your cost basis.
  • Dividends. If you receive these dividends as a cash payment, then your cost basis is reduced. However, using the dividends to purchase additional coverage typically does not affect your cost basis.

You also can borrow money from the cash value of your policy through a policy loan. Loans can be a helpful feature since it provides you with an additional source of liquidity without surrendering your policy or triggering a taxable event.3

Consider cost basis in your financial plan

Your cost basis is the amount of an investment or life insurance contract that you won't owe taxes on when you sell it or cash it out. But it often comes down to more than just the original price you paid. Certain factors can affect your final cost basis.

Understanding how cost basis works and how to calculate it for your specific situation can help you grasp how selling investments or cashing out a contract may impact your tax liability. A Thrivent financial advisor can offer the guidance you need to make the best decision for your financial future.

1Loans and partial surrenders on contracts classified as Modified Endowment Contracts (MEC) are taxed on gains-coming out first and may be subject to a 10% penalty tax if made prior to age 59½.

Modified Endowment Contracts (MECs) do not qualify for tax-free withdrawals.

3Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Hypothetical examples are for illustrative purposes. May not be representative of actual results.

Dividends are not guaranteed.

If requested, a licensed insurance agent/producer may contact you and financial solutions, including insurance may be solicited.