figure or value that is the starting point in computing gain or loss, depreciation, depletion, and amortization. For example, in an asset sale, gain is proceeds minus basis, where basis is the amount on which depreciation is calculated.
- original cost of an asset plus capital improvements, from which any taxable gains (or losses) are determined, after deducting depreciation expenses. In investments, the purchase price, plus out-of-pocket costs such as brokers' commissions, is used in computing short-term or long-term capital gains reportable to the Internal Revenue Service.
- in the futures market, the difference between the spot price, or cash market price, of a security (or commodity) and its price in the futures market. As the delivery date of a futures contract approaches, this difference gradually disappears, and at maturity the cash market and futures market prices should be the same. Most investors use financial futures only as a hedging tool to limit possible losses as interest rates change.
- number of days used in calculating the interest earned in an investment or interest payable on a bank loan. Also called the accrual base.
There are different interest calculation methods:
365-day year base-savings and time deposit accounts paying interest from date of deposit to date of withdrawal, U.S. Treasury bills, and bank loans (interest computed using actual days in the loan). Also called money market basis.
360-day year base-federal agency securities, municipal bonds, corporate bonds, and London Interbank Offered Rate (LIBOR) based instruments. Also called corporate bond equivalent basis.
The difference in interest earned, comparing a 360-day year and 365-day year can be substantial with a large principal invested. For example, $100 invested at 8%, using a 360-day year earns $8.00 at 360 days, whereas $100 invested at 8% using a 365-day year earns $7.89 at 360 days. Comparing interest yield on an investment with a 365-day yield basis to one with a 360-day year is easy; to convert from 365- to 360-day interest, simply multiply the 365-day interest by 1.0139; to convert from 360- to 365-day interest, multiply the 365-day interest by .98630. - in foreign exchange, adjustment in the forward market price of different currencies for variance in interest rates. For example: if interest rates are 5% above U.S. rates, British pound sterling is priced at a 5% discount vis-à-vis the U.S. dollar, allowing different currencies to be traded on a comparable basis. See also purchasing power parity.
amount usually representing the taxpayer's cost in acquiring an asset. It is used for a variety of tax purposes including computation of gain or loss on the sale or exchange of the asset and depreciation with respect to the asset.
In general: original cost plus out-of-pocket expenses that must be reported to the Internal Revenue Service when an investment is sold and must be used in calculating capital gains or losses. If a stock was bought for $1,000 two years ago and is sold today for $2,000, the basis is $1,000 plus expenses and the profit is a capital gain.
Bonds: an investor's Yield To Maturity at a given bond price. A 10% bond selling at 100 has a 10% basis.
Commodities: the difference between the cash price of a hedged money market instrument and a futures contract.
