A client hands you a brokerage 1099-B, a crypto wallet log, a gift of Grandma's stock, and a rental she sold on the installment method. Four transactions, four different basis rules.
Basis is the taxpayer's investment in a piece of property for tax purposes. Gain or loss on the sale or disposition of property is always the amount realized minus the adjusted basis, so basis is the first number you need to pin down. If basis is wrong, the gain or loss is wrong, and so is every answer that depends on it.
When a taxpayer buys property, the starting point is a cost basis. Cost means the price paid plus commissions, sales tax, freight, installation, and title fees. Legal fees to acquire and defend title are capitalized (added to basis), not deducted.
- For real estate, cost basis also includes recording fees, surveys, transfer taxes, and any seller obligations the buyer agrees to pay.
- Basis goes up for capital improvements (a new roof, an addition). It goes down for depreciation allowed or allowable, casualty losses, and easement proceeds.
Common mistakes
- Adding the full gift tax to basis. Only the net-appreciation fraction is added. A $19,000 annual exclusion reduces the denominator, and a gift with no appreciation adds nothing to basis.
- Using the $500,000 exclusion when one spouse fails the use test. Both spouses must meet the use test for the joint amount. Otherwise it collapses to $250,000; ownership by either spouse is not enough.
- Treating a crypto-to-crypto swap as a like-kind exchange. Since 2018 §1031 covers real property only, and virtual currency never qualified after that date.
Bottom line
- Purchased basis is cost plus acquisition costs; gifted basis is carryover for gain and gift-date FMV for loss; inherited basis is date-of-death FMV and always long-term.
- Long-term is more than one year; net short against short, long against long, then cross, then deduct up to $3,000 ($1,500 MFS) against ordinary income.
- Collectibles cap at 28%, unrecaptured §1250 gain at 25%, and net investment income tax adds 3.8% above $200,000 single / $250,000 MFJ MAGI.
- Virtual currency is property; Form 1099-DA reports gross proceeds only for tax year 2025, and no wash-sale rule applies.
Exam shortcut
Read the stem for the acquisition verb first. "Purchased" means cost, "received as a gift" means dual basis (check whether FMV was below the donor's basis before anything else), "inherited" means date-of-death FMV and automatic long-term. That one word settles most basis questions. Then look for a depreciation number.
The full lesson (about 5,026 words, 34 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
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