Basis is the tax value of property in the hands of a taxpayer. When selling property, the difference between basis and sale price is the taxable gain or loss.

Generally, basis is what you paid for the property. If you bought Google stock on the market at $600, it has a $600 tax basis. If you sell the stock for $700, you will recognize $100 of taxable gain. If you sell for $400, you will recognize $200 in tax loss that can be used to offset other taxable gains of a similar type–in the case of stock, capital gains. Both taxable gains and taxable loss are measured as the difference of the sales price from basis.

But basis can be adjusted for many things beyond just purchase price. For example, if a business buys a piece of machinery and depreciates it over time, the basis of that machinery falls with each chunk of depreciation taken. If that machinery is later re-sold at a price above the now-reduced basis, the business will recognize gain, even if the sale price is below the original purchase price.

Basis is usually reset with each transfer of property. If buyer A paid $10,000 for a trademark, and sells the trademark to buyer B for $15,000, buyer A recognizes gain of $5,000, and buyer B takes the property with a new basis of $15,000. But there are certain instances where basis transfers to a new owner. This is the case in some instances where property is transferred into a new business in exchange for a controlling interest in the business, or a share of a partnership.

Basis allocation and adjustment can get very complex. Careful treatment of basis is at the heart of tax planning, and basis considerations are central to forming, buying, and selling a business.