What is cost basis? Why is it important?

What is Cost Basis & Why Should You Care?

🧐 Ever heard of cost basis but not sure what it means? Do you even need to care as an investor or options trader?

Simple Answer:

💰 Cost basis is the original price you paid for an investment.
📊 It’s important when selling stocks or options because it determines your capital gains or losses (aka how much you owe in taxes).

Do You Always Need to Track Cost Basis?

✅ No worries if you invest in a tax-advantaged account (like a Roth IRA)—you won’t owe taxes when selling.
⚠ In a taxable brokerage account? You’ll need to know your cost basis to calculate capital gains taxes when you sell.

👀 Not selling anytime soon? If you’re a buy-and-hold investor, cost basis won’t matter much until you sell.
🔥 Trading options? If you sell covered calls or cash-secured puts, cost basis plays a bigger role in your tax bill.

Methods for Calculating Cost Basis

🔢 Different cost basis methods impact how much tax you’ll owe:

📌 FIFO (First In, First Out) → First shares bought = First shares sold (default for most brokerages).
📌 LIFO (Last In, First Out) → Most recent shares are sold first.
📌 High Cost → Sells highest-cost shares first (lower gains, lower taxes).
📌 Low Cost → Sells lowest-cost shares first (maximizing capital gains).
📌 Tax Efficient → Strategically minimizes tax burden.
📌 Specific Lot Selection → You manually pick which shares to sell.

What’s the Best Strategy?

📊 FIFO is common (but could mean higher taxes if older shares were cheaper).
💸 Options traders may prefer "Low Cost" to maximize gains.
🔄 Long-term investors may prefer "High Cost" to keep lower-cost shares longer.

💡 Consistency is key. Choose a method and stick with it to avoid tax-time confusion! Not sure? Ask a tax pro.

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Happy investing!
-Steve