Cost basis refers to the original value of an asset, such as stocks or real estate, used to determine capital gains or losses when the asset is sold. It includes the purchase price plus any associated costs, like commissions or improvements, which can affect the overall value. Understanding cost basis is essential for tax purposes, as it helps calculate how much profit or loss an investor realizes. When selling an asset, the difference between the selling price and the cost basis determines the taxable gain or loss, impacting the amount owed to the IRS or other tax authorities.