“Basis” is the amount of after-tax money invested in a given asset. This is generally referred to as “Cost Basis” or “Tax Basis”. When you sell the asset, the difference between the basis and what it is sold for is the taxable income from the sale. This income is known as a Capital Gain, and can be either positive or negative (a Capital Loss). Club Accounting has to keep track of two different types of basis. The first type is the basis each member has in the club. The second type is the basis of the assets owned by the club.
The Members’ Basis consists of all of the money they have invested in the club (less the amount of any withdrawals), plus whatever income from the club has been distributed to them for tax purposes. (See Distributing the Club’s Earnings) This figure is shown on the Member Status Report in the column “Paid in Plus Earnings”. When a member withdraws from the club, the difference between his Tax Basis and the cash he receives is his Capital Gain or Loss from selling his share of the club. In the case of a stock withdrawal, the gain is the difference between the member’s basis, and the cash plus the basis of the stock transferred to the member.
Each asset owned by the club has a Tax Basis. The Tax Basis of each security is the price the club paid for it. This includes commissions, fees, and service charges. Although the value of a security changes over time, the cost basis does not, unless the club invests more money into it, sells some of it, or there is some other transaction such as a spinoff. The cash the club owns also has a cost basis, which is always the same as the value, one dollar of cost for each dollar. The combined cost basis of all of the club’s Cash and Securities is the Club’s Tax Basis.
The difference between the Members’ Tax Bases and the Club’s Tax Basis consists of two components, Undistributed Earnings, and Unrealized Gain. When the club receives income such as interest or dividends, the amount of the income is automatically included in the basis of the asset received. However, that income does not go into the members’ basis until it is distributed, generally at the end of the year. Between the time it is received and when it is distributed, it is called Undistributed Earnings.
Unrealized Gains are the difference between the cost of an asset and its current value. If the asset is sold, the gains become Realized Gains. The club’s Unrealized Gain is the difference between the Club’s Tax Basis, and the Members’ Tax Basis plus any Undistributed Earnings (do not confuse this with unrealized gains on the club’s stocks). This occurs when a member withdraws from the club. For example, if a member withdraws from the club, the difference between his cost basis in the club and the cost basis of the assets received is his Capital Gain from selling his share of the club. If the member has a gain, the club will have a loss in the same amount. These differences accumulate over time and are shown in the Unrealized Gain column on the Complete Journal. Unrealized Gain is never distributed to the members: it is just used as a way to balance the books.