Lesson 3 of 25 · 6 min
Cost basis, and what a sale does to it
Selling part of a holding uses up part of the number you subtract, and the part that leaves does not come back.
Basis is the number subtracted from proceeds. Everything difficult about it follows from one fact: it belongs to shares rather than to a holding, and shares leave.
Start with what it is. In most systems basis begins as what was paid, including the costs of acquiring, and it moves over time: certain reinvested distributions add to it, certain returns of capital reduce it, and certain events attach it to a successor asset. It is not what the holding is worth and it is not what the holding once was worth. It is a record of amounts already accounted for, kept so that the same amount is not counted twice.
A sale does something specific and irreversible to it. The shares sold take their basis with them, and that portion is consumed in computing the gain on that sale. What remains is the basis of the shares that remain — no more, and not redistributable across them.
Work it. You hold 4,280 shares acquired at $37.15, so basis is $159,002 and the holding is worth 4,280 × $214.60 = $918,488 at today's price. Sell 1,150 shares: proceeds are $246,790, the basis attached to those shares is 1,150 × $37.15 = $42,722.50, and the gain is $204,067.50. Basis remaining is $159,002 − $42,722.50 = $116,279.50, which is exactly 3,130 × $37.15. The per-share figure did not change; the count did.
This is why a pledge and a sale are not interchangeable ways of raising cash, before any rate is compared. A pledge leaves both the basis and the shares in place. A sale spends both. What either does inside a particular system, for a particular holder, is a question for that holder's own adviser and not one this lesson answers.
Key terms
- Cost basis
- The figure subtracted from proceeds when a gain is computed. It usually starts as what was paid and is adjusted by later events.
- Basis adjustment
- A change to that figure caused by something other than a purchase, such as a reinvested distribution or a return of capital.
Worked example
What leaves when shares leave
4,280 shares acquired at $37.15, now priced at $214.60. You sell 1,150 of them.
- Basis before the sale
- $159,002
- Proceeds
- $246,790
- Basis attached to the shares sold
- $42,722.50
- Gain recognised
- $204,067.50
- Basis remaining
- $116,279.50
4,280 × $37.15.
1,150 × $214.60.
1,150 × $37.15.
$246,790 − $42,722.50.
3,130 × $37.15, and also $159,002 − $42,722.50.
The per-share figure never moved. There are simply fewer shares carrying it, and the portion that left is spent.
Check yourself
You hold 4,280 shares with a basis of $37.15 each and sell 1,150 of them at $214.60. What basis remains, and what would pledging the same shares have left instead?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.