Intuit Academy Tax Practice Exam

The term "basis" in tax terminology refers to the amount of investment in an asset. This foundational concept is essential for determining gain or loss upon the sale of the asset. Basis encompasses the original purchase price of the asset, as well as any additional costs incurred to acquire it, such as closing costs or improvements.

The basis is critical because it is the figure used to calculate any gain or loss when the asset is sold. For example, if you bought a property for $200,000 and made $50,000 in improvements, your basis would be $250,000. If you later sold that property for $300,000, your taxable gain would be calculated by subtracting the adjusted basis from the selling price.

Understanding this concept helps taxpayers make informed decisions about asset transactions and is a fundamental principle in accounting for profits and losses in the tax arena.