Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Cost Basis Choices for Mutual Fund Sales
Posted by: cpw, March 26, 2012 07:25PM
I'm confused; I understood from this board, other boards, and "Money Magazine"-type articles that I could choose the cost basis I wanted to use for selling mutual fund shares as long as I did it before the sale. However, IRS Pub 550 says: "You can figure your gain or loss using a cost basis [ie, FIFO, specific shares] only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund." I've been using average cost "from the beginning" thru the 2011 tax year in all my mutual fund holdings/sales. Thus it sounds to me like I cannot choose a cost basis "at will", and am stuck with average costs forever. My Fidelity Private Client rep agreed with this, and said I may need IRS approval to change my cost basis. There's even a Fidelity form I have to "approve" that says I understand this (before I can make a change). So what am I missing? Thnx

Re: Cost Basis Choices for Mutual Fund Sales
Posted by: RichC, March 26, 2012 08:13PM
You misunderstood the articles. You've never been able to change out of average cost.

How could you, really? Once you started using average cost you "contaminated" the basis of all the remaining lots.

To get out of it you need to dispose of all your holdings in the fund in question. Once all your holdings in the fund are gone, you have a clean slate when you start investing in it again.

Re: Cost Basis Choices for Mutual Fund Sales
Posted by: kaneohe, March 26, 2012 11:52PM
You are referring to a Pub 2011 or earlier so that is true. Funds became
"covered" in 2012 so there is provision for changing basis for the covered shares that you buy in 2012 and later. Not sure about the exact details but I read the term prospectively.....I'm guessing that means when you change your cost basis method, anything you buy from then on is under the new method until you change methods again but you can't change retrospectively.

Re: Cost Basis Choices for Mutual Fund Sales
Posted by: cpw, March 27, 2012 03:00PM
Rich, kaneohe....good input and you could be right, but I don't recall reading anything that said I couldn't change the cost basis of non-covered shares. You're implying my holdings in Fund X will have to be in two "virtual accounts/buckets" (1) my pre-2012 holdings that are polluted by avg cost transactions, and (2) covered shares. Luckily I haven't sold anything this year to pollute the covered bucket, so I have time to consider your remarks. But if I tell Fido to sell 100 shares of X, I'm going to have to tell them which bucket to draw from (if I don't, the covered bucket will get polluted caused by the other bucket's embedded averaging). But Fido (and other funds) don't seem to recognize there's two buckets (their literature/questions re cost basis choices imply there's just one "grand" bucket). I just don't see how it's all going to work operationally. I guess the current turmoil surrounding the IRS Form 8949 is just a precursor of bigger problems to come.

Re: Cost Basis Choices for Mutual Fund Sales
Posted by: DeeDee, March 28, 2012 02:04AM
Wow, that's a good point. What a mess! I have never used the average cost basis method, but it seems to me that would be the only option for a taxpayer who has used it previously regardless of any new cost basis election.



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