Proceeds vs. cost basis
Also known as: proceeds and cost basis, sales proceeds vs. tax basis
Proceeds are the total dollars you receive when you sell a security, while cost basis is what you originally paid for it. The difference between the two is your capital gain or loss, which is the figure the IRS taxes.
When an investor sells a security, two numbers determine the tax consequence. Cost basis is the amount invested to acquire the position — the purchase price plus commissions and any other acquisition costs. Proceeds are what comes back on the sale — the sale price, typically net of commissions. Subtracting basis from proceeds gives the capital gain (a positive result) or capital loss (a negative result).
For example, buying 100 shares at $40 with a $10 commission creates a cost basis of $4,010. Selling those shares later at $55 with another $10 commission produces proceeds of $5,490. The taxable capital gain is $5,490 − $4,010, or $1,480. Note that neither number by itself says anything useful about profitability: a brokerage 1099-B may show $200,000 in total proceeds for the year, but if the total cost basis was $195,000, the reportable gain is only $5,000.
Cost basis is not always the raw purchase price. It is adjusted for events such as stock splits, reinvested dividends, return-of-capital distributions, and the premium paid or received on an option that is later exercised. Inherited securities generally receive a stepped-up basis equal to the fair market value at the date of death, while gifted securities usually carry over the donor's basis. Getting the adjustment right is what makes the gain calculation correct.
The holding period then determines the tax rate applied to the gain: positions held more than one year receive long-term treatment, while shorter holdings are taxed as short-term gains at ordinary income rates. The SIE exam, as well as the Series 7 and Series 65, expect you to compute a gain or loss from a basis and a sale price, adjust basis for splits and reinvestments, and classify the result as long-term or short-term.
Key takeaways
- Cost basis is what you paid to acquire a security, including commissions; proceeds are what you receive when you sell it.
- Proceeds minus cost basis equals the capital gain or loss — the amount actually subject to tax.
- Large total proceeds on a 1099-B do not mean a large gain, because the offsetting basis is not shown in that column.
- Basis is adjusted for splits, reinvested dividends, and return-of-capital distributions, and it is stepped up for inherited securities.
- A holding period over one year makes the gain long-term; one year or less makes it short-term and taxed at ordinary rates.