The Kurzer Group, LLC

Investing in mutual funds is very popular in these days of rising prices. A taxable event occurs when mutual funds are sold. We need to know your basis of the shares sold in order to compute your taxable gain or loss. Going from one fund to another is considered a sale even if both are in the same family of funds. So lets talk about basis.

If you purchased a mutual fund, your basis would be the price you originally paid for the shares, plus any dividends that were reinvested into additional shares, plus commissions paid.
For example:
You bought 100 shares of Fund A for $10 a share. You paid a $50 commission to the broker. Your cost basis would be $10.50 per share ($1,000 + $50 -100).

The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible when paid. you can usually add these fees and charges to your cost of the shares and thereby increase your basis. A fee paid to redeem the shares is usually a reduction in the sale price. There are some situations in which you cannot avail yourself of this deduction. One such situation occurs if you dispose of the shares within 90 days of their purchase and you acquire new shares in the same or another mutual fund for which no fee is charged or the fees are reduced or waived.

If you acquired the shares by gift, the donor's basis becomes your basis. Subsequent dividends reinvested should be added to the cost. If the fair market value at date of gift is less than the basis to the donor, your basis for gain is as stated above. If the fund is sold at a loss, then the basis would be the fair market value on the date of the gift plus any reinvested dividends and gift tax paid. If you acquired your shares by inheritance, your basis is generally the fair market value of the shares at the decedent's death.

When you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. If all the shares were acquired on the same day and for the same price, figuring the basis is not difficult. Generally, shares are acquired at different times and at different costs. To calculate cost of shares sold, you must choose the cost basis or the average basis. The cost basis may be either specific identification or first-in, first-out. If you can identify the exact shares sold, you can use your adjusted basis for those shares to figure your gain or loss. you can use this method if you instruct your broker to sell a particular lot and get confirmation from your broker stating that. First-in, first-out is a method that assumes the shares being sold were the first ones acquired; thus it is the oldest shares. Lastly, we have the average share basis. In this method, you add up all your costs and divide this figure by the number of shares you own to get an average cost per share. This cost would be used for the shares sold, as well as the balance left over of shares.

As you can see, the method you use to figure the cost basis has a direct influence on the gain or loss resulting from a sale. As you can also see, determining your basis is not as simple as you might have thought.