Cost basis is the purchase price of an asset. It is compared to the price obtained when the asset is eventually sold, where the difference is a taxable gain or loss. In essence, the cost basis of an asset is treated as the cost of goods sold, which is subtracted from the sale price. The remaining value (if positive) is taxed as a capital gain. Depending on the situation, the cost basis can be adjusted upward for subsequent investments in the asset (such as upgrades to a house), or adjusted downward for depreciation.