Tax planning and compliance for investors
Free Online Guides
How to find the basis of particular mutual fund shares you hold.
When you sell shares of stock, you need to know the basis of those shares to calculate your gain or loss. The same applies to sales of mutual fund shares. Mutual fund investors often find that it's easier to determine the total basis of all their shares than it is to determine the basis of particular shares. Here's an example where that may be true. Suppose you invested $100 per month over a period of four months with the following results:
The price per share of the mutual fund varies from time to time. As a
result, the number of shares you receive for each $100 is different.
If you sell all the shares at one time, it's easy enough to see that your basis is $400. But suppose you withdraw only a portion of your account, resulting in a sale of, say, 8.477 shares. How do you determine the basis of those shares?
One answer is to use one of the averaging methods that are explained in other pages in this Guide. If you don't use one of those methods, you need to find the basis of the particular shares you sold. This is a three-step process:
If you haven't elected to use one of the averaging methods, you're
permitted to specify which shares you are selling at the time of a sale. You
would do this the same way for mutual fund shares as for shares of stock in
other types of companies. See Identifying the
Shares You Sell
Most mutual fund investors don't specify which shares they're selling. In this case, the tax law says that the shares you sold were the earliest shares you acquired.
Example: For the table presented in the Overview above we asked what the result would be if the owner sold 8.477 of the shares. In that case, the sale included all of the shares bought on 3/1/97, all of the shares bought on 4/1/97, and 0.669 of the shares bought on 5/1/97.
As you can see, the process of determining which shares were sold can become tedious if shares were purchased on many different dates. Unless you have software designed to deal with this problem, you'll need to use a spreadsheet program or be very careful in your use of a calculator.
In most cases the initial basis of shares is the cost. The cost includes any brokerage commission or "load" paid to purchase the shares. In the example above, the basis for each block of shares is simply $100.
Note: There are a variety of special rules for determining initial basis for shares received in different circumstances, such as gifts, wash sales, and divorce. For details see Stock Basis and Holding Period.
You may also need to know the basis per share. In the example we've been working through, we need to find out how much of the $100 basis for the shares bought on 5/1/97 should be allocated to the 0.669 shares that were sold. The math is pretty easy. First divide the basis of all the shares in that block of stock ($100.00) by the number of shares (3.899) to get a basis per share of $25.65. Then multiply that amount by the number of shares that were sold (0.669) to arrive at the answer: $17.16.
And finally: Add the $200 basis of the first two blocks of shares, which were also sold, to arrive at a total basis of $217.16 for the 8.477 shares that were sold.
The calculation above assumes that nothing has happened to change the basis of the shares between the time they were purchased and the time they were sold. Often that's the case, but it's possible for the basis of mutual fund shares to be adjusted from time to time.
Other adjustments are possible, but these are the two basis adjustments that are of particular concern to mutual fund investors. Many mutual funds never pay these types of dividends, but some do. If your mutual fund is one of the ones that do, you'll have to make appropriate adjustments to the basis you determine according to the procedure described above.
Example: Suppose there was a $0.16 per share return of capital dividend between the date of the purchases described above and the date of the sale. The number of shares sold was 8.477, so the basis must be reduced by $0.16 times 8.477, or $1.36. The adjusted basis is $217.16 minus $1.36, or $215.80.
If you don't use an averaging method, you'll have to keep records that show the basis of each block of shares you bought. When we refer to a block of shares, we mean the shares bought at a particular price on a particular date. If you buy shares at the same price on two different dates, they're separate blocks because of the different dates. If you buy shares at different prices on the same date (not a likely occurrence for mutual fund shares) you have separate blocks because of the different prices.
If you buy shares under a regular savings plan — for example, $100 per month — you'll have a separate block of shares for each purchase. And if you choose to have your dividends reinvested, you also have a block of shares for each dividend. When you reinvest a dividend, you're treated as if you received the dividend in cash and immediately used that money to buy more shares.
As a result, one investor may hold a large number of separate blocks of stock. Imagine the situation if someone bought shares every month over a period of eight years, and also chose to have dividends reinvested. The good news is that this investor has built up a tidy sum of money with this disciplined saving. The bad news is that she has more than 100 separate blocks of shares, each with a different basis!
If the mutual fund happens to be one of those that pay dividends that require basis adjustments, the calculations become truly nightmarish. Each basis adjustment applies to all of the shares owned at the time of the dividend. Blocks of shares purchased in the earlier years may require numerous basis adjustments, while shares purchased more recently would be affected only by the more recent dividends. It's like chopping up the broomsticks that are carrying those pails of water, only to find you have more broomsticks and more pails of water. You may end up feeling that the sorcerer's apprentice had it easy!
Averaging won't turn your nightmare into a cozy dream, but it can eliminate many of these calculations. If you choose the simpler single-category method, you merely keep track of the total basis of the shares you own. That can be a much easier task than figuring the basis of each block of shares. And even if you choose the more difficult double-category averaging method, your life may still be a lot easier than chasing all those brooms around.
|That Thing Rich People Do|
|The fastest, easiest way to learn the principles of investing.|
|Our complete guide to Roth IRAs and Roth accounts in 401k and similar plans: choosing, creating, building and using these accounts.|
|Consider Your Options|
|A plain-language guide for people who receive stock options or other forms of equity compensation.|
|Equity Compensation Strategies|
|A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.|
|Capital Gains, Minimal Taxes|
|Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.|