Basis is a term used in computing gains and losses on the disposition of an asset. For any business owner or individual taxpayer it is important to understand what the Internal Revenue Service (IRS) is really seeking. What is your tax basis in an asset?
When the sales price exceeds the associated costs, there is a gain on the sale. Depending on the nature of the item sold, this gain may be ordinary (customarily found in your business) or a capital gain (investment related).
Code Section 465 of the Internal Revenue Code defines ‘At-Risk’ as the financial value the taxpayer has in jeopardy related to the business activity the taxpayer is invested in as some form of an owner. Effectively, the taxpayer may only take losses on his tax return contingent on the loss being directly tied to invested dollars with some form of tax basis.
When a product or investment is sold, the seller must realize a gain or loss from the transaction. The actual sale or transaction will trigger the gain or loss realized. In effect, the receipt of cash sets the threshold for a ‘REALIZED’ amount. Unrealized gains or losses are potential i.e. on paper transactions.