Definition
Cost basis is the original purchase price of an asset plus any qualifying improvements or adjustments, serving as the baseline for calculating capital gains or losses when the asset is sold. For alternative assets like art, collectibles, or luxury goods, cost basis includes the initial purchase price, dealer fees, restoration costs, and other capital improvements that enhance the asset’s value.
Significance in Alternative Asset Valuation
Cost basis plays a critical role in tax planning and estate management for alternative asset owners. Unlike publicly traded securities where cost basis is straightforward, alternative assets present unique challenges. Improvements like art restoration, wine storage upgrades, or collectible authentication can modify the cost basis, affecting future tax liability. Additionally, inherited alternative assets receive a “stepped-up basis” equal to their fair market value at the time of inheritance, potentially eliminating capital gains tax on appreciation that occurred during the deceased owner’s lifetime.
For wealth managers and estate planners, understanding cost basis is essential for tax-efficient portfolio management. The difference between an asset’s current fair market value and its cost basis determines the potential tax impact of a sale, influencing decisions about when and how to liquidate alternative assets.
How Impossival Approaches This
We help clients track and document cost basis adjustments for their alternative assets through comprehensive valuation records. Our platform maintains historical data that supports cost basis calculations, including documentation of improvements and professional services that qualify as basis adjustments under IRS guidelines.
Related Concepts
• Fair Market Value - Current market value used for stepped-up basis calculations • Capital Gains - Profit calculated using cost basis as the starting point • Stepped-Up Basis - Inheritance tax benefit that resets cost basis • Tax Appraisal - Professional valuation for tax-related cost basis determinations