Personal Finance – Figuring Mutual Fund Gains and Losses

Figuring your gain or loss when you’re disposing of mutual fund shares is one of the trickier parts of tax preparation and planning. You need to determine which shares were sold and the original basis (cost) of those shares . If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is easy. Realistically, however, you probably acquired your shares at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more difficult. There are two ways you can go about this. You can choose to use either a cost basis or an average basis to figure your gain or loss.

To figure your gain or loss using a cost basis, you have two options, specific share identification or First-In-First-Out (FIFO)

Specific share identification means adequately identiying the specific shares you sold. Be careful of the word adequately here, because in this case it has a very specific meaning. You are presumed to have adequately identified the shares you sold by satisfying two conditions:

1. Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and

2. Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular shares sold or transferred.

The alternative cost based method is a litte more straightforward. With this approach, you use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first, therefore First-in-First-Out. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely.

Often, investors find that it’s easier to determine the total basis of all their shares than it is to determine the basis of particular shares. These investors use an average basis to determine gains and losses. There is some conditions for using the average method like making sure the mututal fund shares are identical to each other, and that they’ve been in an account with a custodian or agent. The average basis is then determined by averaging the basis of all shares in an account regardless of how long you have held them.

You can make the election to use the average basis method at any time. The election will be effective for sales or other dispositions of stocks that occur after you notify the custodian or agent of your election. Your election must identify each account with that custodian or agent and each fund in that account to which the election applies. The election can also indicate that it applies to all accounts with a custodian or agent, including accounts you later establish with the custodian or agent. Oftentimes, you can find the average basis of your shares from information provided by the fund.

It is important to maintain your records as evidence of your basis for tax purposes. If you haven’t navigated the waters of mutual fund gains and losses before, or even if you have, it may be best to request the help of a professional bookkeeper or accountant. For instance, a professional will help you understand the difference between covered and non-covered securities or point out that you can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale.