When you make an investment, the price you pay for the asset is called your “cost basis.” This is the threshold amount for calculating the capital gains taxes that are required when you sell. If you buy 100 shares of Berkshire Hathaway (BRK.B) for $166 in 2016, and then sell them at $250 in 2021, your 23.8% tax requirement is one the difference between $166 and $250. The $84 gain requires a $19.99 tax payment, leaving the investor with $64.01 x 100 = $6,401 in net-of-tax investment gains that gets added to the $16,600 initial investment for a total investment value of $23,001.
As part of estate planning, it is important to know which of your assets receive a “stepped-up” cost basis upon on your death when the ownership transfers to your heir or beneficiary. Stepped-up cost basis means that that the starting point of a tax analysis readjusts upward … Read the rest of this article!