These pages explain special tax rules for sales of mutual fund shares.
Each purchase of stock in a company, and each purchase of mutual fund shares, creates a distinct lot. For stock in a company you generally have to track the cost basis of each separate lot. For mutual fund shares (and stocks held in a dividend reinvestment plan, or DRIP) you have a choice between using this separate lot method or instead using the simpler but less flexible average basis method. The following pages provide a complete guide to the two methods: advantages and disadvantages, how to select (or change) a method for your investments, and how to apply the method you’ve selected.
Overview of Cost Basis Methods
A bird’s eye view of how cost basis methods and disposition methods work together.
Changes in the Averaging Rules
The averaging rules changed dramatically when the cost basis regulations began to apply to mutual fund shares in 2012. This page briefly describes the key differences.
Electing a Cost Basis Method
Steps you have to take when choosing to use the separate lot method or the average basis method.
Using the Separate Lot Method
This page illustrates the steps required — and the difficulties involved — in maintaining records of your mutual fund investments using the separate lot method.
Using the Average Basis Method
Basis calculations are easier when using this method.
Changing Cost Basis Methods
Current rules are more liberal than the prior ones in permitting you to switch back and forth between methods.
Special Rule for Gift Shares
This rule matters only if you receive a gift of mutual fund shares with a date-of-gift value greater than the donor’s basis, and you’re using (or want to elect) the average basis method.
Double-Category Averaging Method
This method no longer exists, so the information here is of interest only if you used this method in the past.
Sales Load Deferral Rule
A special rule that applies if you avoid paying sales load on a new purchase due to having paid it on a previous purchase.
Shares Held Six Months or Less
Special rules can apply to loss on mutual fund shares held six months or less.