In its broadest sense, cost basis refers to the price you paid for your shares. That figure is adjusted upward for reinvested dividends and capital gains and any commissions or transaction fees you paid.
What cost basis won't necessarily tell you is how much money you made on an investment. It's intended to help you calculate your capital gains and losses when it's time to file your taxes.
The IRS requires you to report capital gains and losses on your annual tax return when you sell or redeem shares of stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investments.
Choosing the right method for calculating your cost basis will determine in part how much you'll pay in taxes for the current year, and how detailed your recordkeeping will need to be.
The IRS phased in regulatory changes related to cost basis beginning in 2011. As a result, we're required to provide reporting for a wide variety of nonretirement accounts and investment types. In addition to sending the reports directly to investors, we must send them to the IRS as well.