What is the definition of tax basis?

The definition of tax basis is fundamentally important in understanding how gains and losses are calculated for tax purposes. The correct answer identifies tax basis as the amount of a taxpayer's unrecovered cost of an asset. This is crucial because tax basis serves as the starting point for determining gain or loss upon the sale or disposition of an asset.

When a taxpayer sells an asset, the gain or loss is calculated by subtracting the tax basis from the sale price. If the sale price exceeds the basis, the taxpayer realizes a gain; if the basis exceeds the sale price, a loss is recognized. The tax basis is adjusted over time due to various factors such as improvements made to the asset, depreciation, or additional costs incurred. Thus, knowing the accurate basis is vital for proper tax reporting and planning.

Other definitions do not align with the concept of tax basis. The total income earned from an asset refers to the income generated and is separate from the concept of basis. The rate at which an asset will be taxed pertains to the applicable tax rate on income or capital gains but does not define the basis itself. The market value of an asset is its current worth in the market, which can differ significantly from its basis and is not used in the calculation of gain or