Dividend Income Guide
Dividend glossary

Cost Basis

Cost basis is the original price you paid for an investment, including any commissions. It's used to calculate capital gains (or losses) when you eventually sell.

In more depth

For dividend investors using DRIP, cost basis becomes complex over time because reinvested dividends purchase shares at different prices throughout the years. Most brokerages track cost basis automatically, but understanding it helps avoid tax surprises.

Simple example

You buy 100 shares of an ETF at $50 each. Your cost basis is $5,000. If you sell all shares at $70, your capital gain is $70 × 100 − $5,000 = $2,000.

Cost basis with DRIP

When dividends are reinvested, each purchase adds shares at the current price. After years of DRIP, you may own shares purchased at many different prices.

Your brokerage tracks this automatically using one of several cost basis methods:

  • FIFO (First In, First Out): Sells oldest shares first — often creates largest gains
  • Specific identification: You choose which shares to sell — most flexible
  • Average cost: Blends all purchase prices — simple and common for ETFs

Why cost basis matters at tax time

When you sell, the IRS requires you to report the gain or loss. That calculation requires knowing your cost basis. Most major brokerages report cost basis on your Form 1099-B, but keeping your own records is good practice — especially for older investments or positions transferred between brokerages.

Related terms

  • Capital gains — the taxable gain calculated from cost basis
  • DRIP — reinvestment that creates multiple cost basis lots
  • Tax-advantaged account — where cost basis tracking is less critical since gains aren't taxed annually
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