Basis
Candlefocus EditorThere are two main types of basis – the accounting basis or the economic basis. The accounting basis is the total costs written off for taxes, whereas the economic basis is the total costs associated with the investment, including the fair market value of any related investments.
In addition to defining the basis of a product or service, basis can also refer to the difference between the spot price of an asset and its corresponding derivative futures contract. For example, if the spot price of wheat is $2.50 and its futures contract is priced at $3.00, then the basis is $0.50. It is important to understand the difference between spot prices and future prices because the numbers can fluctuate rapidly, which can significantly alter the basis.
This measure of basis also holds significant implications for taxation. Since it represents the cost associated with a product, the same cost can be used for tax deductions. For instance, if an investor has invested in gold and later on in the same year sells that gold, he or she can use the basis to determine the amount of tax to be paid on the sale. Similarly, a company that purchases raw materials for production can use the basis for calculating their cost of goods sold for tax purposes.
In essence, basis is an important concept in finance that can have significant ramifications for taxation and overall financial gain. By understanding their basis, investors and companies can make more informed decisions on investments and ensure they maintain a fiscally responsible standing.