Understanding the term "basis" is important for tax purposes. When selling shares of mutual funds, stocks, or bonds, investors need to know their basis in the investment. Investors are taxed on the difference between an investment's sale price and its basis.

There are certain methods allowed by the IRS to determine which shares are being sold, depending on whether the shares are stocks, bonds, or mutual funds. These methods determine how much gain or loss you have from an investment sale, and each method can produce a different result.