Definition: Cost basis is used to determine your gain or loss for tax purposes should an investment be sold. The cost basis is the purchase price of a mutual fund (or other asset) plus reinvested dividends and reinvested capital gains distributions.
If an investment is sold and the market value exceeds the cost basis, then there is a realized capital gain. Conversely, if the cost basis exceeds the market value, then there is a realized capital loss.
Also Known As: Tax basis
XYZ Mutual Fund is purchased for $1,000 on 1/1/XXXX.
Dividends of $50 and capital gains distributions of $100 are reinvested on 11/1/XXXX.
Value of XYZ Mutual Fund is $1,000 on 12/31/XXXX.
The cost basis of XYZ Mutual Fund (assuming no other transactions in the fund) = $1,150