Irs Publication 564 - Mutual Fund Distributions

will use his or her social security number as the

shares sold, compared with the use of the

Sales, Exchanges,

TIN.

single-category method to figure average basis

If you do not provide your TIN, your broker is

(discussed next).

and Redemptions

required to withhold tax on the gross proceeds of

a transaction. For 2004, the withholding rate is

Average Basis

28%. In addition, you may be penalized.

When you sell or exchange your mutual fund

shares, or if they are redeemed (a redemption),

You can figure your gain or loss using an aver-

Identifying the Shares Sold

you will generally have a taxable gain or a de-

age basis only if you acquired the shares at

ductible loss. This also applies to shares of a

various times and prices, and you left the shares

To figure your gain or loss when you dispose of

tax-exempt mutual fund. Sales, exchanges, and

on deposit in an account handled by a custodian

mutual fund shares, you need to determine

redemptions are all treated as sales of capital

or agent who acquires or redeems those shares.

which shares were sold and the basis of those

assets. The amount of the gain or loss is the

To figure average basis, you can use one of

shares. If your shares in a mutual fund were

difference between your adjusted basis (defined

the following methods.

acquired all on the same day and for the same

earlier) in the shares and the amount you realize

•

price, figuring their basis is not difficult. How-

from the sale, exchange, or redemption. This is

Single-category method.

ever, shares are generally acquired at various

explained further under Gains and Losses, later.

•

Double-category method.

times, in various quantities, and at various

Sale. In general, a sale is a transfer of shares

prices. Therefore, figuring your basis can be

for money only.

Once you elect to use an average basis, you

more difficult. You can choose to use either a

must continue to use it for all accounts in the

Exchange. An exchange is a transfer of

cost basis or an average basis to figure your

same fund. (You must also continue to use the

shares in return for other shares.

gain or loss.

same method.) However, you may use the cost

Redemption. A redemption occurs when a

basis (or a different method of figuring the aver-

fund reacquires its shares from you in exchange

age basis) for shares in other funds, even those

Cost Basis

for money or other property.

within the same family of funds.

You can figure your gain or loss using a cost

Recordkeeping. When there is a sale,

Example. You own two accounts that hold

basis only if you did not previously use an aver-

exchange, or redemption of your

shares of the income fund issued by Company

age basis for a sale, exchange, or redemption of

shares in a fund, keep the confirmation

RECORDS

A. You also own 100 shares of the growth fund

other shares in the same mutual fund.

statement you receive. The statement shows

issued by Company A. If you elect to use aver-

To figure cost basis, you can choose one of

the price you received for the shares and other

age basis for the first account of the income

the following methods.

information you need to report gain or loss on

fund, you must use average basis for the second

•

your return.

Specific share identification.

account. However, you may use cost basis for

•

the growth fund.

Exchange of shares in one mutual fund for

First-in first-out (FIFO).

shares in another mutual fund. Any ex-

You may be able to find the average

change of shares in one fund for shares in an-

TIP

basis of your shares from information

Specific share identification. If you ade-

other fund is a taxable exchange. This is true

provided by the fund.

quately identify the shares you sold, you can use

even if you exchange shares in one fund for

the adjusted basis of those particular shares to

shares in another fund within the same family of

Single-category

method.

Under

the

figure your gain or loss.

funds. Report any gain or loss on the shares you

single-category method, you find the average

You will adequately identify your mutual fund

gave up as a capital gain or loss in the year in

basis of all shares owned at the time of each

shares, even if you bought the shares in different

which the exchange occurs. Usually, you can

disposition, regardless of how long you owned

lots at various prices and times, if you:

add any service charge or fee paid in connection

them. Include shares acquired with reinvested

with an exchange to the cost of the shares ac-

1) Specify to your broker or other agent the

dividends or capital gain distributions.

quired. For an exception, see Commissions and

particular shares to be sold or transferred

Table 3 illustrates the use of the single-cate-

load charges under Shares Acquired by

at the time of the sale or transfer, and

gory method to figure the average basis of

Purchase, earlier.

shares sold, compared with the use of the FIFO

2) Receive confirmation in writing from your

method to figure cost basis (discussed earlier).

Information returns.

Mutual funds and bro-

broker or other agent within a reasonable

Even though you include all unsold shares of

kers must report proceeds from sales, ex-

time of your specification of the particular

a fund in a single category to compute average

changes, or redemptions to the Internal

shares sold or transferred.

basis, you may have both short-term and

Revenue Service. They must give each cus-

You continue to have the burden of proving

long-term gains or losses when you sell these

tomer a written statement with that information

your basis in the specified shares at the time of

shares. To determine your holding period, the

by January 31 of the year following the calendar

sale or transfer.

shares disposed of are considered to be those

year the transaction occurred. Form 1099 – B, or

acquired first.

a substitute, may be used for this purpose.

First-in first-out (FIFO).

If your shares were

Report your sales shown on Form(s)

acquired at different times or at different prices

Example. You bought 400 shares in the

1099 – B (or substitute) on Schedule D (Form

and you cannot identify which shares you sold,

LJO Mutual Fund: 200 shares on May 15, 2002,

1040) along with your other gains and losses. If

use the basis of the shares you acquired first as

and 200 shares on May 15, 2003. On November

the total of the sales price amounts reported on

the basis of the shares sold. In other words, the

11, 2003, you sold 300 shares. The basis of all

Form(s) 1099 – B in box 2 is more than the total

oldest shares you own are considered sold first.

300 shares sold is the same, but you held 200

you report on lines 3 and 10 of Schedule D,

You should keep a separate record of each

shares for more than 1 year, so your gain or loss

attach a statement to your return explaining the

purchase and any dispositions of the shares

on those shares is long-term. You held 100

difference.

until all shares purchased at the same time have

shares for 1 year or less, so your gain or loss on

been disposed of completely.

Taxpayer identification number. You

those shares is short-term.

Table 3 (on the next page) illustrates the use

must give the broker your correct taxpayer iden-

of the FIFO method to figure the cost basis of

tification number (TIN). Generally, an individual

Page 7

Irs Publication 564 - Mutual Fund Distributions - 2003 Page 7

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