Define tax basis.

The correct definition of tax basis is the amount of a taxpayer's investment in a property for tax purposes. Tax basis is crucial in determining the gain or loss when an asset is sold. It includes not only the purchase price but also any related costs and improvements made to the property over time. When an asset is sold, the tax basis is subtracted from the sale price to calculate the taxable gain or loss.

This concept is fundamental because it influences the amount of tax a taxpayer might ultimately owe when they dispose of the asset.

In contrast, the total amount of tax owed refers to the tax liability itself, not the investment in the property. The value of an asset at the time of sale only considers the market value and ignores the historical investment that has been made. Cumulative income does not relate to assets or their basis, focusing instead on the taxpayer's income over a period, which is irrelevant to the calculation of the property tax basis.