Whether it is a house or shares of a company's stock, the money you initially used to purchase an asset is the cost basis. For example, if you purchased 250 shares of stock for $1,000, the cost basis for that investment is $1,000. You have to know the cost basis of your investments to be able to calculate your gains and losses. Sometimes you might alter the cost basis, for example, by building an addition to your house or buying more shares of the same company's stock. When you do such things, you must calculate the adjusted basis for the investment.
Determine the initial cost basis of your investment by calculating the original amount of money you spent to purchase the asset or security. For instance, suppose you purchased 250 shares of a company's stock at $4 per share. The cost basis for that investment would be $1,000.
Track any adjustments you make to your initial investment. For instance, suppose that two months later, you buy 100 shares of the same stock for $5 per share.
Calculate your adjusted basis by factoring in the change to your investment. For example, if you had bought 100 more shares of stock at $5 per share, your adjusted basis would now be $1,500. That is, you add the $1,000 you originally spent to the $500 you spent when you bought more shares.
You make the same type of calculations when you calculate the adjusted basis of real estate. For example, suppose you bought a house for $200,000. Your cost basis is $200,000. Later if you add a $30,000 addition to your home, your adjusted cost basis is $230,000.
Although in theory calculating an adjusted basis is easy, it can get complicated quickly -- such as if you buy and sell a few shares of a company's stock several times during the tax year. Other factors, such as commissions and reinvested dividends, can also affect the numbers. If you are unsure about how to calculate your adjusted basis, consult a tax professional.