Here are the key changes in the rules for averaging that took effect in 2012.
When Congress changed the law to require brokers and mutual fund companies to report cost basis and holding period when shares are sold, the Treasury decided to completely revamp the rules for averaging — that is, using the average basis of shares bought at different times and different prices, rather than using the separate basis of each individual lot of shares. Here are seven ways the rules have changed.
- Old: Averaging was available only for mutual fund shares.
- New: Averaging is available also for regular stocks if held in a dividend reinvestment plan (“DRIP”).
Need for election
- Old: You had to elect averaging if you wanted to use it.
- New: Your broker or mutual fund company may use averaging as the default method, and in this case the average basis method will apply unless you elect not to use it.
Method of electing
- Old: You elected averaging by attaching a statement to your tax return.
- New: For newer, covered shares, you notify your broker or mutual fund company when you elect averaging. (For older, noncovered shares, you elect averaging on your return as under prior rules.)
- Old: The regulations permitted a method called double-category averaging.
- New: The rarely-used double-category method has been eliminated.
- Old: The method used by most investors was called single category averaging.
- New: It’s now called the average basis method.
Scope of averaging election
- Old: Your averaging election applied to all shares of that mutual fund, even if held in different accounts.
- New: An averaging election applies only within one account — and a single investment account is treated as two separate accounts for purposes of this rule if it holds both noncovered and covered shares.
Termination of averaging election
- Old: Once you elected an averaging method, you had to continue using it for as long as you held shares in that mutual fund.
- New: You can terminate use of the average basis method at any time, even in the middle of a year, and in some situations you can retroactively revoke an averaging election.