Using Costs Basis To Your Advantage

Costs basis is the cost of an asset or investment for tax purposes, which includes the purchase price and expenses such as commissions paid. Essentially if you subtract expenses from the purchase price paid, you'll arrive at the cost basis for any particular investment. But how do you use this tax principal as advantage?

Taxes paid on a particular investment will depend on the length of the holding period of a particular investment. A holding period is defined as the period of time at which an investment is owned. The holding period is based on trade dates and not settlement dates. So if you make a trade on Monday that settles on Tuesday, in IRS terms the holding period started on Monday. Holding period categories have been established to define capital gains and losses: Short term and long term.

Short Term. Gains realized on investments that have been held for less than one year. This type of holding period is taxed at the same tax rate as the investor's normal income tax rate.

Long Term. Gains realized on investments that have been held for greater than one year. This type of holding period is taxed at the investors normal income tax rate not to exceed a maximum of 15%. So it is definitively evident that holding investments for one year or more will yield a greater return. However, if your goal is to experience a loss for tax purposes, you'll want to consider which tax year is best to experience a loss; that is a great question for your tax adviser.


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