Tax Basis Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Tax Basis, written in plain English, along with examples of how it is used.

What is Tax Basis?

Refer to the definition of basis.

History and Meaning of Tax Basis

Tax basis refers to the original monetary value assigned to an asset when it is acquired. It serves as an essential factor in determining the tax liability of taxpayers when the asset is sold, exchanged or disposed of. It is established for tax purposes in the year the asset is acquired and is used to determine the capital gains tax when the asset is sold or disposed of.

The tax basis can be adjusted according to several factors such as improvements, depreciation deductions, and other costs which can increase or decrease the tax basis of the asset. The tax basis can also be impacted in cases where the asset is acquired through inheritance or gift.

Examples of Tax Basis

  1. John purchases a piece of land for $100,000 and later sells it for $150,000. The tax basis for this transaction will be $100,000, and the capital gain will be calculated based on this amount.

  2. Lisa borrows money to purchase a vehicle for $30,000. She later sells the car for $25,000. The tax basis for the vehicle will be $30,000, and the capital loss for the transaction will be $5,000.

  3. Jack inherits a property from his parents, which they purchased for $500,000 many years ago. The tax basis for Jack’s inherited property will be $500,000, regardless of its current value.

Legal Terms Similar to Tax Basis

  1. Capital Gain: The profit realized from the sale of an asset.

  2. Depreciation: The loss in value of an asset over time.

  3. Adjusted Basis: The original tax basis of an asset adjusted for certain factors such as improvements or depreciation.

  4. Fair Market Value: The price at which an asset would change hands between a buyer and a seller, each acting prudently and without undue pressure.