8609 / What is “tax basis” and how is it used in determining the amount of a taxpayer’s capital gain or loss?
“Tax basis” is a taxpayer’s after-tax investment in property. In other words, when a taxpayer acquires property for money, the purchase price is presumed to be his or her after tax investment in such property.1 When property is sold or exchanged, for purposes of computing gain, the difference between the amount received less the taxpayer’s basis in the property is the taxable gain.2 Similarly, for purposes of computing a loss (meaning the taxpayer received less than the original cost of the property), the difference between the taxpayer’s basis in the property and the amount received is the taxable loss.3
Example: In 2025, Asher purchased Apple stock for $1,000. In 2026, Asher sold the stock for $1,500. Asher’s taxable gain is $500, or the difference between the amount received and his basis in the stock ($1,500 minus $1,000). No tax applies to the $1,000 received because that amount represents the recovery of Asher’s initial after-tax investment in the property, i.e., his basis.
If the taxpayer acquires property other than by purchase, basis is determined pursuant to different rules. For example, if the taxpayer acquires property from a decedent by inheritance or bequest, the basis in the property is its fair market value as of the date of the decedent’s death.4
New rules regarding consistent basis reporting provide, generally, that the basis of property acquired from a decedent cannot exceed the final value of such property that has been used for estate tax purposes.5
With respect to a gift of property, the general rule is the donee taxpayer takes the donor’s basis in the property.6
Example: Asher gifts Apple stock he purchased for $1,000 to his friend Ashley. At the time of the gift, the stock had a fair market value of $1,500. Ashley’s basis in the stock is $1,000, the same as Asher’s. So, if she sold the stock for $1,500, she would recognize a $500 gain.
On the other hand, there is an exception to the rule that the donee taxpayer takes the donor’s basis in the property. This occurs when, at the time of the gift, the donor’s basis is greater than the fair market value of the gifted property. In that case, the donee taxpayer’s basis is the fair market value of the property.7
Example: Asher gifts Apple stock he purchased for $1,000 to his friend Ashley. At the time of the gift, the stock had a fair market value of $500. Because Asher’s basis of $1,000 is greater than the $500 fair market value, Ashley’s basis in the stock is $500. As a result, if she sold the stock for $500, she would recognize no gain or loss. The reason for this rule is to prevent one taxpayer from shifting a taxable loss to the other taxpayer. If Ashley had taken Asher’s $1,000 basis, she would have reported a $500 loss rather than Asher.
1. IRC § 1012.
2. IRC § 1001(a).
3. IRC § 1001(a).
4. IRC § 1014.
5. IRC § 1014(f).
6. IRC § 1015(a).
7. IRC § 1015(a).