32.9 Basis of Redeemed Shares
Planning Reminder
To figure gain or loss, you need to know the basis per share. Generally, your basis is the purchase price of the shares, including shares acquired by reinvesting distributions back into the fund, plus commission or load charges.
Load charges.
Basis does not include load charges (acquisition fees) on the purchase of mutual-fund shares if you held the shares for 90 days or less and then exchanged them for shares in a different fund in the same family of funds at a reduced load charge.
Cost basis of sold shares.
If you are selling your entire mutual fund account, you need to know your total basis for all the shares. If your shares in the fund were acquired at different times, and you are selling only some of the shares in your account, you need to know which shares are being sold and the basis of those shares to determine gain or loss. In general, you can choose between at least three basis methods: the average cost method, the specific identification method, and the first-in, first-out method. These methods are discussed below. When you sell shares that you acquired after 2011, your cost basis for those shares will be reported to both you and the IRS; see below.
Basis will be reported to the IRS when you sell shares acquired after 2011.
New basis reporting rules apply for mutual fund shares acquired after 2011 in taxable accounts other than money market funds; retirement accounts are not affected. Shares acquired in a taxable account on or after January 1, 2012 are considered “covered shares.” When you sell covered shares, the fund will report your cost basis on Form 1099-B to both you and the IRS.
For shares acquired before 2012, or “noncovered shares,” your mutual fund will not report cost basis to the IRS when you sell. The fund will probably report basis to you on Form 1099-B using the average cost method when you sell noncovered shares, but this does not require you to use the average cost method on your tax return and the basis information will not be reported to the IRS.
If you acquired shares both before 2012 and after 2011, a sale may involve noncovered shares, covered shares, or both, depending on the basis method you select and the number of shares sold. For example, if you use the average cost method, noncovered shares will be considered redeemed first in the order you acquired them, before covered shares are considered sold. The fund will separately figure the average cost for your noncovered and covered shares.
Whether the sold shares are covered or noncovered, you are responsible for reporting your cost basis and calculating your gain or loss on Form 8949 and Schedule D (Form 1040). For covered shares, the IRS can match the basis reported by the fund on Form 1099-B with the basis you report on your return.
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Basis methods you can select.
To identify the shares you are selling, you can choose between the average cost method, the specific identification method, the first in, first out method, or some other variation of the specification method. Check with the fund for its rules on selecting a preferred basis method for covered shares and about the procedures for and effect of a change in basis methods.
For covered shares, the fund will likely use average cost as its “default” method for reporting basis on Form 1099-B to the IRS (and you) if you have not selected another method prior to a sale. If average cost is the default method, and you want to use another basis method for your first sale of covered shares, such as the specific identification method, you must select that method online or on a paper form you mail to the fund before the fund will complete your transaction. Once specific identification is selected, you can identify the specific shares you want to sell by phone (if allowed by the fund), online, or in writing. If you initially use the average cost method, either as the default or because you selected it, and you want to change to another method, or you initially choose another method and want to change to average cost, you must make the change from or to average cost online or in writing, not by phone. If you sell covered shares using the average cost method and then elect another basis method, the new method will apply only to shares purchased after the date that the change request is processed.
For noncovered shares, you may use the specific identification method to report basis on Form 8949 and Schedule D only if you select that method prior to the sale (online or in writing) and you keep for your records a confirmation from the fund showing that you selected specific shares to be sold. You will need purchase records to substantiate the basis you report on your return for the specifically identified shares.
Here is a summary of the basis methods.
- Average Cost Method—averages your cost for all shares in the fund regardless of when they were acquired. You do not have to identify the exact shares being sold. The average cost for each share is the total cost for all shares, including those acquired by reinvesting dividends and capital gain distributions, divided by the number of shares. For holding period purposes when you file your return (long- or short-term treatment on Form 8949/Schedule D), shares sold under the average cost method are considered sold in the order you acquired them (FIFO). Your fund will calculate average cost separately for your covered and noncovered shares.
- Specific Identification Method—allows you to select exactly which shares are being sold, enabling you to determine your gain or loss and achieve a desired tax result. Check with your fund for its procedures in selecting the specific identification method and for identifying the shares to be sold using the method.
- First-in, first-out (FIFO) Method—treats shares as sold in the order that they were acquired.
Your fund may also offer variations of the above methods, such as highest in, first out (HIFO), which treats the highest cost shares as sold first, or last in, first out (LIFO), which treats the most recently acquired shares as sold first. Check with your fund for the available methods and selection procedures.
Planning Reminder