| Pub. 564, Mutual Fund Distributions |
2005 Tax Year |
Publication 564 - Main Contents
Tax Treatment of Distributions
A distribution you receive from a mutual fund may be an ordinary dividend, a qualified dividend, a capital gain distribution,
an exempt-interest
dividend, or a nondividend distribution. The fund will send you a Form 1099-DIV or similar statement telling you the kind
of distribution you
received. This section discusses the tax treatment of each kind of distribution, describes how to treat reinvested distributions,
and explains how to
report distributions on your return.
You may be treated as having received a distribution of capital gains even if the fund does not distribute them to you. See
Undistributed
capital gains under Capital Gain Distributions.
Community property states.
If you are married and receive a distribution that is community income, one-half of the distribution is generally
considered to be received by each
spouse. If you file separate returns, you must each report one-half of any taxable distribution. Get Publication 555, Community
Property, for more
information on community income.
If the distribution is not considered community income under state law and you and your spouse file separate returns,
each of you must report your
separate taxable distributions.
Share certificate in two or more names.
If two or more persons, such as you and your spouse, hold shares as joint tenants, tenants by the entirety, or tenants
in common, distributions on
those shares are considered received by each of you to the extent provided by local law.
Certain year-end dividends received in January.
Dividends declared and made payable by mutual funds in October, November, or December are considered received by shareholders
on December 31 of the
same year even if the dividends are actually paid during January of the following year.
Tax-exempt mutual fund.
Distributions from a tax-exempt mutual fund (one that invests primarily in tax-exempt securities) may consist of ordinary
dividends, capital gain
distributions, nondividend distributions, or undistributed capital gains like any other mutual fund. These distributions generally
are treated the
same as distributions from a regular mutual fund.
Distributions designated as exempt-interest dividends are not taxable. (See Exempt-Interest Dividends, later.)
An ordinary dividend is a distribution by a mutual fund out of its earnings and profits. Include ordinary dividends that you
receive from a mutual
fund as dividend income on your individual income tax return.
Ordinary dividends are the most common type of dividends. They will be reported in box 1a of Form 1099-DIV or on a similar
statement you receive
from the mutual fund.
Qualified dividends.
Many ordinary dividends you received are also classified as qualified dividends. The amount of your qualified dividends
will be shown in box 1b of
Form 1099-DIV or on a similar statement you get from the mutual fund.
Qualified dividends are taxed at the same lower rates that apply to a net capital gain. They are taxed at 15% if the
regular tax rate that would
apply is 25% or higher. They are taxed at 5% if the regular tax rate that would apply is lower than 25%.
To be a qualified dividend subject to the 5% or 15% rate, a dividend must meet all of the following requirements.
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The dividend must have been paid by a U.S. corporation or a qualified foreign corporation. See chapter 1 of Publication 550
for the
definition of a qualified foreign corporation.
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The dividend must not be of a type excluded by law from the definition of a qualified dividend. See chapter 1 of Publication
550 for a list
of these types of dividends.
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You must meet the holding period requirement (discussed next).
Holding period.
You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend
date. The ex-dividend date
is the first date following the declaration of a dividend on which the buyer of a stock will not receive the next dividend
payment. Instead, the
seller will get the dividend.
When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you
acquired it.
More information.
See chapter 1 of Publication 550 for more information about qualified dividends.
Capital Gain Distributions
These distributions are paid by mutual funds from their net realized long-term capital gains. The Form 1099-DIV (box 2a) you
receive or the fund's
statement will tell you the amount you are to report as a capital gain distribution. Capital gain distributions are taxed
as long-term capital gains
regardless of how long you have owned the shares in the mutual fund.
Undistributed capital gains.
Mutual funds may keep some of their long-term capital gains and pay taxes on those undistributed amounts. You must
report your share of these
amounts as long-term capital gains, even though you did not actually receive a distribution. You can take a credit for your
share of any tax paid
because you are considered to have paid it.
Form 2439.
The fund will send you Form 2439, instead of Form 1099-DIV, showing your share of the undistributed long-term capital
gains in box 1a and any tax
paid by the mutual fund in box 2. Attach Copy B of Form 2439 to your return.
Increase to basis.
When you report undistributed capital gains from a mutual fund, you must increase your basis in the shares. You must
keep Copy C of Form 2439 to
show this increase. See Adjusted Basis, later.
Exempt-Interest Dividends
A mutual fund may pay exempt-interest dividends to its shareholders if it meets certain requirements. These dividends are
paid from tax-exempt
interest earned by the fund. Since the exempt-interest dividends keep their tax-exempt character, do not include them in income.
However, you may need
to report them on your return. See Information reporting requirement, next. The mutual fund will send you a statement within 60 days after
the close of its tax year showing your exempt-interest dividends. Exempt-interest dividends are not shown on Form 1099-DIV.
Information reporting requirement.
Although exempt-interest dividends are not taxable, you must report them on your tax return if you are required to
file. This is an information
reporting requirement and does not convert tax-exempt interest to taxable interest. Also, this income is generally a “ tax preference item” and
may be subject to the alternative minimum tax. If you receive exempt-interest dividends, you should get Form 6251, Alternative
Minimum
Tax—Individuals, for more information.
Nondividend Distributions
A nondividend distribution is a distribution that is not out of earnings and profits and is a return of your investment, or
capital, in the mutual
fund and is shown in box 3 of Form 1099-DIV.
A nondividend distribution reduces your basis in the shares. Basis is explained under Keeping Track of Your Basis, later. Your basis
cannot be reduced below zero. If your basis is zero, you must report the nondividend distribution on your tax return as a
capital gain. Report this
capital gain on Schedule D (Form 1040). Whether it is a long-term or short-term capital gain depends on how long you held
the shares.
Example.
You bought shares in a mutual fund in 2001 for $12 a share. In 2002, you received a nondividend distribution of $5 a share.
You reduced your basis
in each share by $5 to an adjusted basis of $7. In 2003, you received a nondividend distribution of $1 per share and further
reduced your basis in
each share to $6. In 2004, you received a nondividend distribution of $2 per share. Your basis was reduced to $4. In 2005,
the nondividend
distribution from the mutual fund was $5 a share. You reduce your basis in each share to zero and report the excess ($1 per
share) as a long-term
capital gain on Schedule D.
Reinvestment of Distributions
Most mutual funds permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving
cash. You must
report the reinvested amounts the same way as you would report them if you received them in cash. This means that reinvested
ordinary dividends and
capital gain distributions generally must be reported as income. Reinvested exempt-interest dividends generally are not reported
as income. Reinvested
return of capital distributions are reported as explained under Nondividend Distributions, earlier. See Keeping Track of Your Basis,
later, to determine the basis of the additional shares.
You must report mutual fund distributions on Form 1040 or Form 1040A. You cannot report mutual fund
distributions on Form 1040EZ.
You cannot use Form 1040A and must use Form 1040 in either of the following situations.
Form 1040A.
If you file Form 1040A, report your exempt-interest dividends on line 8b. Report your ordinary dividend distributions
on line 9a and your qualified
dividend distributions on line 9b. If the total of the ordinary dividends you received is more than $1,500 or you received
ordinary dividends as a
nominee, first report the ordinary dividends in Part II of Schedule 1, on line 5. Report the total from line 6 of that schedule
on line 9a of Form
1040A. Attach Schedule 1 to your return.
If you reported qualified dividends on line 9b, use the Qualified Dividends and Capital Gain Tax Worksheet in the
Form 1040A instructions.
Do not include capital gain distributions as dividend income on Form 1040A or Schedule 1.
Capital gain distributions.
If you received capital gain distributions, you may have to file Form 1040. But you can report capital gain distributions
on line 10 of Form 1040A,
instead of on Form 1040, if both of the following are true.
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None of the Forms 1099-DIV (or substitute statements) you received have an amount in box 2b, 2c, or 2d.
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You do not have to file Form 1040 for any other reason. (For example, you must not have any other capital gains or any capital
losses.)
If you can use Form 1040A to report your capital gain distributions, use the Qualified Dividends and Capital Gain
Tax Worksheet in the Form 1040A
instructions to figure your tax.
Form 1040.
If you file Form 1040, report your exempt-interest dividends on line 8b. Report your ordinary dividend distributions
on line 9a and your qualified
dividend distributions on line 9b. If the total of the ordinary dividends you received is more than $1,500 or you received
ordinary dividends as a
nominee, first report the ordinary dividends on Schedule B, Part II, line 5. Report the total from line 6 of that schedule
on line 9a of Form 1040.
Attach Schedule B to your return.
If you reported qualified dividends on line 9b, use the Qualified Dividends and Capital Gain Tax Worksheet in the
Form 1040 instructions or the
Schedule D Tax Worksheet in the Schedule D instructions, whichever applies, to figure your tax.
Do not include capital gain distributions as dividend income on Form 1040 or Schedule B.
Capital gain distributions.
If you received capital gain distributions, you report them either directly on Form 1040, line 13 or on Schedule D,
line 13, depending on your
situation. Report them on Schedule D, line 13, unless both of the following are true.
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The only amounts you would have to report on Schedule D are capital gain distributions from box 2a of Form 1099-DIV (or similar
statement).
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You do not have an amount in box 2b, 2c, or 2d, of any Form 1099-DIV (or similar statement).
If both of the above statements are true, report your capital gain distributions directly on line 13 of Form 1040 and check
the box on that
line. Also, use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax.
Undistributed capital gains.
To report undistributed capital gains, you must complete Schedule D and attach it to your return. Report these gains
on Schedule D, line 11, and
attach Copy B of Form 2439 to your return. Report the tax paid by the mutual fund on these gains on Form 1040, line 70, and
check box a on that line.
Table 1.
See Table 1 for more information on where to report your mutual fund distributions on Form 1040 or Form 1040A.
Table 1. Reporting Mutual Fund Distributions on Form 1040 or 1040A
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If you receive . . .
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AND . . .
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Then report the distribution on:
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Form 1040 . . .
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Form 1040A . . .
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ordinary dividends
(Form 1099-DIV, box 1a)
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your total ordinary dividends received are $1,500 or less, and
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you did not receive any ordinary dividends as a nominee
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line 9a
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line 9a
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your total ordinary dividends received are more than $1,500, or
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you received ordinary dividends as a nominee
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line 9a, and
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Schedule B, line 5
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line 9a, and
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Schedule 1, line 5
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qualified dividends
(Form 1099-DIV, box 1b)
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line 9b, and
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Qualified Dividends and Capital Gain Tax Worksheet, line 2, or Schedule D Tax Worksheet, line 2, whichever applies
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capital gain distributions
(Form 1099-DIV, box 2a)
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you do not have to file Form 1040, Schedule D
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you have to file Form 1040, Schedule D (See Schedule D instructions for line 13)
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Schedule D, Line 13
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you must use Form 1040; you cannot use Form 1040A
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section 1250, 1202, or collectibles gain
(Form 1099-DIV, box 2b, 2c, or 2d)
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Schedule D (see the Schedule D instructions)
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you must use Form 1040; you cannot use Form 1040A
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nondividend distributions
(Form 1099-DIV, box 3)
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generally not reported*
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generally not reported*
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exempt-interest dividends (from the mutual fund statement, not reported on Form 1099-DIV)
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line 8b
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line 8b
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undistributed capital gains
(Form 2439, boxes 1a-1d)
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Schedule D (see the Schedule D instructions)
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you must use Form 1040; you cannot use Form 1040A
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* Report any amount in any excess of your basis in your mutual fund shares on Schedule D. Use
line 8 if you held the shares more than one year. Use line 1 if you held your mutual fund shares 1 year or less.
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Nominees.
If you received a Form 1099-DIV or Form 2439 as a nominee (that is, it includes amounts that actually belong to someone
else, other than your
spouse), you must file a Form 1099-DIV or Form 2439 with the Internal
Revenue Service and give the actual owner a copy. See the instructions for Forms 1099 or Form 2439 for details.
If you received an ordinary dividend distribution as a nominee, report it on line 5 of Schedule B (Form 1040) or Schedule
1 (Form 1040A). Under
your last entry on line 5, enter a subtotal of all ordinary dividends listed. Below this subtotal, enter “ Nominee Distribution” and show the
total ordinary dividends you received as a nominee. Subtract this amount from the subtotal and enter the result on line 6.
If you received a capital gain distribution or were allocated an undistributed capital gain as a nominee, report only
the amount that belongs to
you on line 10 of Form 1040A, line 13 of Form 1040, or Schedule D (Form 1040), whichever is appropriate. Attach a statement
to your return showing the
full amount you received or were allocated and the amount you received or were allocated as a nominee.
Foreign tax deduction or credit.
Some mutual funds invest in foreign securities or other instruments. Your mutual fund may choose to allow you to claim
a deduction or credit for
the taxes it paid to a foreign country or U.S. possession. The fund will notify you if this applies to you. The notice will
include your share of the
foreign taxes paid to each country or possession and the part of the dividend derived from sources in each country or possession.
You may be able to claim a credit for income tax paid to a foreign country. However, it may be to your benefit to
treat the tax as an itemized
deduction on Schedule A (Form 1040). For more information on claiming a foreign tax deduction or credit, get Publication 514,
Foreign Tax Credit for
Individuals.
Keeping Track of Your Basis
You should keep track of your basis in mutual fund shares because you need the basis to figure any gain or loss on the shares
when you sell,
exchange, or redeem them.
Original basis.
As explained in the following paragraphs, original basis depends on how you acquired your shares.
Adjusted basis.
As described later under Adjusted Basis, your original basis is adjusted (increased or decreased) by certain events. You must keep
accurate records of all events that affect basis so you can figure the proper amount of gain or loss.
Shares Acquired by Purchase
The original basis of mutual fund shares you bought is usually their cost or purchase price. The purchase price usually includes
any commissions or
load charges paid for the purchase.
Example.
You bought 100 shares of Fund A for $10 a share. You paid a $50 commission to the broker for the purchase. Your cost basis
for each share is $10.50
($1,050 ÷ 100).
When you buy or sell shares in a fund, keep the confirmation statements you receive. The statements show the price you paid
for the shares when you
bought them and the price you received for the shares when you disposed of them. The information from the confirmation statement
when you purchased
the shares will help you figure your basis in the fund.
Commissions and load charges.
The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. You can usually add
acquisition 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 redemption
price (sales price).
You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of
the following conditions apply.
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You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge.
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You dispose of the shares within 90 days of the purchase date.
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You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because
of the
reinvestment right you got when you acquired the original shares.
The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares.
The rest of the original
fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of
the new shares).
Reinvestment right.
This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge,
or by paying a reduced fee
or load charge.
Shares Acquired by Reinvestment
The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions
used to purchase
each full or fractional share. This rule applies even if the distribution is an exempt-interest dividend that you do not report
as income.
When you acquire shares through reinvestment, keep the statements that show each date, amount, and number of full or fractional
shares purchased.
Keep track of any adjustments to basis of the shares as they occur.
Generally, you must know the basis per share to compute gain or loss when you dispose of the shares. This is explained under
Identifying the
Shares Sold, later.
To determine your original basis of mutual fund shares you acquired by gift, you must know:
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The donor's adjusted basis,
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The date of the gift,
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The fair market value (the last quoted public redemption price) of the shares at the time of the gift, and
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Any gift tax paid on the gift of the shares.
Fair market value less than donor's adjusted basis.
If the fair market value (FMV) of the shares at the time of the gift was less than the adjusted basis to the donor
at the time of the gift, your
basis for gain on their disposition is the donor's adjusted basis. Your basis for loss is the FMV of the shares at the time
of the gift. In this
situation, it is possible to sell the shares at neither a gain nor a loss because of the basis you have to use.
Example.
You are given mutual fund shares with an adjusted basis of $10,000 at the time of the gift. The FMV of the shares at the time
of the gift is
$9,000. You later sell the shares for $9,500. The basis for figuring a gain is $10,000, so there is no gain. There also is
no loss, since the basis
for figuring a loss is $9,000. In this situation, you have neither a gain nor a loss.
Fair market value equal to or more than donor's adjusted basis.
If the FMV of the shares at the time of the gift was equal to or more than the donor's adjusted basis at the time
of the gift, your basis is the
donor's adjusted basis at the time of the gift, plus all or part of any gift tax paid on the gift, depending on the date of
the gift.
For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551, Basis of
Assets.
Shares Acquired by Inheritance
If you inherited shares in a mutual fund, your original basis is generally the fair market value (FMV) (the last quoted public
redemption price) on
the date of the decedent's death, or the alternate valuation date if chosen for estate tax purposes.
Community property states.
In community property states, you and your spouse generally are considered to each own half the
estate (excluding separate property). If one spouse dies and at least half of the community interest is includible in the
decedent's gross estate
(whether or not the estate is required to file a return), the FMV of the community property at the date of death becomes the
basis of both halves of
the property.
For example, if the FMV of the entire community interest in a mutual fund is $100,000, the basis of the surviving
spouse's half of the shares is
$50,000. The basis of the heirs' half of the shares also is $50,000.
In determining the basis of assets acquired from a decedent, property held in joint tenancy is community property
if its status was community
property under state law.
Shares you gave the decedent.
A different basis rule applies to inherited shares that you or your spouse gave the decedent within the 1-year period
ending on the date of the
decedent's death if, on the date of the gift, the shares were appreciated property. In this situation, the basis of the inherited
shares is the
decedent's adjusted basis in them immediately before his or her death, rather than their FMV.
This basis rule also applies if the decedent's estate (or a trust of which the decedent was the grantor) sells the
shares instead of distributing
them to you, and you are entitled to the proceeds.
Appreciated property.
Appreciated property is any property (including mutual fund shares) whose FMV is more than its adjusted basis.
Exceptions.
This basis rule does not apply if the decedent died before 1982 or you gave the shares to the decedent before August
14, 1981.
After you acquire mutual fund shares, you may need to make adjustments to your basis. The adjusted basis of your shares is
your original basis
(defined earlier), increased or reduced as described here.
Addition to basis.
Increase the basis in your shares by the difference between the amount of undistributed capital gain you include in
income and the tax considered
paid by you on that income.
The mutual fund reports the amount of your undistributed capital gain in box 1a of Form 2439, and any tax paid by
the mutual fund in box 2. You
should keep Copy C of all Forms 2439 to show increases in the basis of your shares.
Reduction of basis.
You must reduce your basis in your shares by any nondividend distributions that you receive from the fund.
The mutual fund reports the amount of any nondividend distributions in box 3 of Form 1099-DIV. You should keep the
form to show the decrease in the
basis of your shares.
Basis cannot go below zero.
Your basis cannot be reduced below zero. If your basis is zero, you must report the nondividend distribution on your
tax return as a capital gain.
Report this capital gain on Schedule D (Form 1040). Whether it is a long-term or short-term capital gain depends on how long
you held the shares.
No reduction of basis.
You do not reduce your basis for distributions from the fund that are exempt-interest dividends.
Table 2. Mutual Fund Record
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Mutual Fund
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Acquired
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Adjustment to Basis Per Share
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Adjusted
2 Basis Per Share
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Sold or redeemed
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Date
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Number of Shares
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Cost Per Share
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Date
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Number of Shares
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| 1 Include share received from reinvestment of distributions.
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| 2 Cost plus or minus adjustments.
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Table 2. This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. Enter the cost per share when
you acquire new shares and any adjustments to their basis when the adjustment occurs. This worksheet will help you figure
the adjusted basis when you
sell or redeem shares.
Sales, Exchanges, and Redemptions
When you sell or exchange your mutual fund shares, or if they are redeemed (a redemption), you will generally have a taxable
gain or a deductible
loss. This also applies to shares of a tax-exempt mutual fund. Sales, exchanges, and redemptions are all treated as sales
of capital assets. The
amount of the gain or loss is the difference between your adjusted basis (defined earlier) in the shares and the amount you
realize from the sale,
exchange, or redemption. This is explained further under Gains and Losses, later.
Sale.
In general, a sale is a transfer of shares for money only.
Exchange.
An exchange is a transfer of shares in return for other shares.
Redemption.
A redemption occurs when a fund reacquires its shares from you in exchange for money or other property.
Recordkeeping. When there is a sale, exchange, or redemption of your shares in a fund, keep the
confirmation statement you receive. The statement shows the price you received for the shares and other information you need
to report gain or loss on
your return.
Exchange of shares in one mutual fund for shares in another mutual fund.
Any exchange of shares in one fund for shares in another fund is a taxable exchange. This is true even if you exchange
shares in one fund for
shares in another fund within the same family of funds. Report any gain or loss on the shares you gave up as a capital gain
or loss in the year in
which the exchange occurs. Usually, you can add any service charge or fee paid in connection with an exchange to the cost
of the shares acquired. For
an exception, see Commissions and load charges under Shares Acquired by Purchase, earlier.
Information returns.
Mutual funds and brokers must report proceeds from sales, exchanges, or redemptions to the Internal Revenue Service.
They must give each customer a written statement with that information by January 31 of the year following the calendar year
the transaction occurred.
Form 1099-B, or a substitute, may be used for this purpose.
Report your sales shown on Form(s) 1099-B (or substitute) on Schedule D (Form 1040) along with your other gains and
losses. If the total of the
sales price amounts reported on Form(s) 1099-B in box 2 is more than the total you report on lines 3 and 10 of Schedule D,
attach a statement to your
return explaining the difference.
Taxpayer identification number.
You must give the broker your correct taxpayer identification number (TIN). Generally, an individual will use his
or her social security number as
the TIN.
If you do not provide your TIN, your broker is required to withhold tax on the gross proceeds of a transaction. For
2006, the withholding rate is
28%. In addition, you may be penalized.
Identifying the Shares Sold
To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis
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 not difficult.
However, shares are
generally acquired at various times, in various quantities, and at various prices. Therefore, figuring your basis can be more
difficult. You can
choose to use either a cost basis or an average basis to figure your gain or loss.
You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange,
or redemption of
other shares in the same mutual fund.
To figure cost basis, you can choose one of the following methods.
Specific share identification.
If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure
your gain or loss.
You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices
and times, if you:
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Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer,
and
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Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular
shares sold
or transferred.
You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.
First-in first-out (FIFO).
If your shares were acquired at different times or at different prices and you cannot identify which shares you sold,
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. 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.
Table 3 (on the next page) illustrates the use of the FIFO method to figure the cost basis of shares sold, compared
with the use of the
single-category method to figure average basis (discussed next).
You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you
left the shares on
deposit in an account handled by a custodian or agent who acquires or redeems those shares.
To figure average basis, you can use one of the following methods.
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Single-category method.
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Double-category method.
Once you elect to use an average basis, you must continue to use it for all accounts in the same fund. (You must also continue
to use the same
method.) However, you may use the cost basis (or a different method of figuring the average basis) for shares in other funds,
even those within the
same family of funds.
Example.
You own two accounts that hold shares of the income fund issued by Company A. You also own 100 shares of the growth fund issued
by Company A. If
you elect to use average basis for the first account of the income fund, you must use average basis for the second account.
However, you may use cost
basis for the growth fund.
You may be able to find the average basis of your shares from information provided by the fund.
Single-category method.
Under the single-category method, you find the average basis of all shares owned at the time of each disposition,
regardless of how long you owned
them. Include shares acquired with reinvested dividends or capital gain distributions.
Table 3 illustrates the use of the single-category method to figure the average basis of shares sold, compared with
the use of the FIFO method to
figure cost basis (discussed earlier).
Even though you include all unsold shares of a fund in a single category to compute average basis, you may have both
short-term and long-term gains
or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those
acquired first.
Example.
You bought 400 shares in the LJO Mutual Fund: 200 shares on May 14, 2004, and 200 shares on May 13, 2005. On November 10,
2005, you sold 300
shares. The basis of all 300 shares sold is the same, but you held 200 shares for more than 1 year, so your gain or loss on
those shares is long term.
You held 100 shares for 1 year or less, so your gain or loss on those shares is short term.
To figure the basis of shares you sell, use the steps in the following worksheet.
Example 1.
You bought 300 shares in the LJP Mutual Fund: 100 shares in 2002 for $1,000 ($10 per share); 100 shares in 2003 for $1,200
($12 per share); and 100
shares in 2004 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 + $1,200 + $2,600). On May
17, 2005, you sold 150
shares. The basis of the shares you sold is $2,400 ($16 per share), figured as follows.
Remaining shares.
The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis
of the shares sold. The next
time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made
a subsequent adjustment to
basis).
Example 2.
The facts are the same as in Example 1, except that you sold an additional 50 shares on December 15, 2005. You do not need to recompute
the average basis of the 150 shares you owned at that time because you acquired or sold no shares, and had no other adjustments
to basis, since the
last sale. Your basis is the $16 per share figured earlier.
Example 3.
The facts are the same as in Example 1, except that you bought an additional 150 shares at $14 a share on September 15, 2005, and then
sold 50 shares on December 16, 2005. The total adjusted basis of all the shares you owned just before the sale is $4,500,
figured as follows.
The basis of the shares sold is $750 ($15 a share), figured as follows.
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