The Internal Revenue Service wants to know your basis. Why? Because basis can affect the amount of tax you owe, and the IRS thinks lots of folks are misreporting it.
In IRS-speak, basis is your investment in an asset. That asset can be your business property, your home, the securities in your portfolio, your jewelry—pretty much any property of value.
If you sell an asset and receive more money than you invested in it, you have a capital gain. Selling the item for less than your investment gives you a capital loss. Either way, the calculation—and the ultimate tax effect—depends on your basis.
That’s one reason Congress recently proposed having your broker report what you pay for your investments. However, the requirement is not yet law, so for now you’re on your own.
Still, there’s no reason to be lax about keeping track of basis. In addition to helping you avoid overpaying your taxes, accurate records can be invaluable if the IRS has questions.