How is basis defined in tax terms?

Basis, in tax terms, is defined as a measure of the taxpayer's investment in property. This concept is foundational in determining gain or loss for tax purposes when an asset is sold. The basis includes the original cost of the property, along with any additional costs incurred that improve the property, and adjustments may be made for depreciation, depletion, or other factors that affect its value over time.

When calculating the gain or loss on the sale of an asset, the taxpayer compares the amount realized from the sale to the basis. If the amount realized exceeds the basis, a gain occurs, which may be subject to taxation. Conversely, if the basis is greater than the amount realized, a loss occurs which can impact tax liability as well.

In contrast to the other options, the other definitions either misrepresent this concept or apply only to specific scenarios. The value of property at sale (the first option) refers to the market value but does not encompass the full measure of the investment made by the taxpayer. The amount of loan taken (the third option) is not pertinent to basis; it merely indicates financing and does not reflect the taxpayer's investment. Lastly, the selling price of an asset (the fourth option) is the price at which the asset is sold