Question

Describe what is meant by basis and how it applies to taxes.

Answer 1

Tax basis is the value of the asset, calculated when the asset is sold, for computing the loss or gain arising out of that sale of asset. Generally, basis is the purchase value of the asset as reduced by the amount of accumulated depreciation till the date of sale.

How it applies to tax:

Suppose an asset was purchased for $50,000 and has accumulated depreciation of $21,000 and is sold for $59,000. In this case the basis would be $29,000 (50000-21000) and capital gain tax will be calculated on $30,000 (59000-29000).