Cost basis is the original purchase cost of an asset (such as stocks, bonds, or property), plus any adjustments that result from transactions over the period you own the asset. Examples of adjustments would be an increase in valuation due to a property improvement or a decrease in valuation due to unreimbursed storm damage to the property.
When you sell the asset, your cost basis gets subtracted from the money you collect from the sale. Instead of paying tax on the full amount, you only get taxed on the profit (the selling price minus the cost basis).
See this response regarding reporting the transaction.
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