what is basis

Basis is a term used in finance and tax law that generally refers to the difference between the price and expenses in a transaction when calculating taxes. In tax law, basis is the cost or value of an asset used to determine equity or ownership for the purpose of tax assessment, exchange, or sale. The tax basis of an asset is generally its cost basis, which may be reduced by allowances for depreciation, and the reduced basis is referred to as the adjusted tax basis. The adjusted cost basis is the value of an asset at the time of sale, which is calculated by subtracting the original cost of acquiring the asset from its adjusted value. Basis may also refer to the variation between the spot price of a deliverable commodity and the relative price of the futures contract. In the futures market, basis represents the difference between the cash price of the commodity and the futures price of that commodity. Basis is a fundamental concept for portfolio managers and traders to grasp because the relationship between cash and futures prices affects the value of the contracts used in hedging.