Basis

What Is Basis?

Basis has two common meanings in investing. In futures and commodity markets, basis is the difference between the spot price of an asset and the price of a futures contract on that same asset. By convention, it is calculated as:

Basis = Cash Price − Futures Price

For tax purposes, basis is the amount an investor has put into an asset, usually its purchase price plus certain costs such as commissions. It is the starting point for determining taxable gain or loss when the asset is sold.

How Futures Basis Works

Basis changes over time, especially as a futures contract approaches expiration. Near expiration, the cash and futures prices usually move toward each other, a process called convergence. Basis can also shift with local supply, demand, storage costs, and transportation conditions.

Businesses that use futures to reduce price risk, a practice known as hedging, pay close attention to basis because their final price depends on it. In a hypothetical example, a grain buyer might lock in a futures price but still face a local cash price that differs from it. If the basis moves in their favor, the effective price they receive improves. If it moves against them, the effective price falls, even if the futures price itself does not change.

Cost Basis for Taxes

Cost basis starts with the total amount paid for an investment, including commissions and fees. It can later be adjusted for events such as stock splits, reinvested dividends, and return of capital distributions. When the investment is sold, the sale proceeds minus the adjusted basis equal the gain or loss.

For example, suppose an investor buys 100 shares at a hypothetical price of 20 per share and pays a 10 commission. The basis is 2,010. If the shares are later sold for 2,500 in total, the capital gain is 490. Rules for calculating basis differ by country and asset type, so official tax guidance is the authoritative reference.

Why It Matters

Basis helps investors interpret futures prices and understand how their taxable gains or losses are measured. Tracking cost basis accurately over the life of an investment makes it easier to report results correctly.