Cost basis is the value you paid for your shares (generally, the purchase price) plus or minus certain adjustments. It is a key component of the equation used to calculate your reportable gain (or loss) on the sale of stock.
Sale Price—Cost Basis = Reportable Gain (or Loss)
With stock plans, adjustments may be needed to determine the correct cost basis amount. Your employer reports any ordinary income related to your stock compensation on your W-2. This generally means you’ve already paid taxes on the value of the shares and this is part of your “purchase” price.
During tax season, Fidelity will issue two forms you will need for cost basis information:
Form 1099-B (an IRS form)
Supplemental Information form (a special form Fidelity prepares to help you)
The cost basis reported on Form 1099-B reflects the purchase price only and doesn’t account for income reported by your employer. The IRS rules do not allow brokers to report the adjusted cost basis that includes the compensation income, but Fidelity includes this information on the Supplemental Information form. If the cost basis is reported incorrectly on your tax return, you could potentially pay too much in taxes when you file your return, so it is important to have all your tax forms when filing.
To learn more about tax reporting for stock sales, review Using cost basis to calculate a gain or loss (PDF) and the Taxes and tax-filing page.