Publication 564 - Mutual Fund Distributions - Internal Revenue Service

Reduction of basis. You must reduce your

2. You dispose of the shares within 90 days

basis at the time of the gift, plus all or part of any

of the purchase date.

gift tax paid on the gift, depending on the date of

basis in your shares by any nondividend distri-

the gift.

butions that you receive from the fund.

3. You acquire new shares in the same mu-

The mutual fund reports the amount of any

For information on figuring the amount of gift

tual fund or another mutual fund, for which

nondividend distributions on Form 1099-DIV,

tax to add to your basis, see Property Received

the fee or charge is reduced or waived

box 3. You should keep the form to show the

as a Gift in Publication 551, Basis of Assets.

because of the reinvestment right you got

decrease in the basis of your shares.

when you acquired the original shares.

Shares Acquired by

Basis cannot go below zero. Your basis

The amount of the original fee or charge in

Inheritance

cannot be reduced below zero. If your basis is

excess of the reduction in (3) is added to the

zero, you must report the nondividend distribu-

cost of the original shares. The rest of the origi-

tion on your tax return as a capital gain. Report

If you inherited shares in a mutual fund, your

nal fee or charge is added to the cost basis of the

this capital gain on Schedule D (Form 1040).

original basis is generally the fair market value

new shares (unless all three conditions above

Whether it is a long-term or short-term capital

(FMV) (the last quoted public redemption price)

also apply to the purchase of the new shares).

gain depends on how long you held the shares.

on the date of the decedent’s death, or the

Reinvestment right. This is the right to ac-

alternate valuation date if chosen for estate tax

No reduction of basis.

You do not reduce

quire mutual fund shares in the same or another

purposes.

your basis for distributions from the fund that are

mutual fund without paying a fee or load charge,

exempt-interest dividends.

or by paying a reduced fee or load charge.

Community property states.

In community

property states, you and your spouse generally

Table 2. This is a worksheet you can

Shares Acquired by

are considered to each own half the estate (ex-

use to keep track of the adjusted basis

cluding separate property). If one spouse dies

of your mutual fund shares. Enter the

Reinvestment

RECORDS

and at least half of the community interest is

cost per share when you acquire new shares

includible in the decedent’s gross estate

and any adjustments to their basis when the

The original cost basis of mutual fund shares

(whether or not the estate is required to file a

adjustment occurs. This worksheet will help you

you acquire by reinvesting your distributions is

return), the FMV of the community property at

figure the adjusted basis when you sell or re-

the amount of the distributions used to purchase

the date of death becomes the basis of both

deem shares.

each full or fractional share. This rule applies

halves of the property.

even if the distribution is an exempt-interest divi-

For example, if the FMV of the entire commu-

dend that you do not report as income.

nity interest in a mutual fund is $100,000, the

Sales, Exchanges,

When you acquire shares through rein-

basis of the surviving spouse’s half of the shares

vestment, keep the statements that

is $50,000. The basis of the heirs’ half of the

and Redemptions

show each date, amount, and number

RECORDS

shares also is $50,000.

of full or fractional shares purchased. Keep track

In determining the basis of assets acquired

of any adjustments to basis of the shares as they

When you sell or exchange your mutual fund

from a decedent, property held in joint tenancy is

occur.

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

community property if its status was community

you will generally have a taxable gain or a de-

property under state law.

Generally, you must know the basis

ductible loss. This also applies to shares of a

TIP

per share to compute gain or loss when

tax-exempt mutual fund. Sales, exchanges, and

Shares you gave the decedent. A different

you dispose of the shares. This is ex-

redemptions are all treated as sales of capital

basis rule applies to inherited shares that you or

plained under

Identifying the Shares

Sold, later.

assets. The amount of the gain or loss is the

your spouse gave the decedent within the

difference between your adjusted basis

(defined

1-year period ending on the date of the dece-

Shares Acquired by Gift

earlier)

in the shares and the amount you realize

dent’s death if, on the date of the gift, the shares

from the sale, exchange, or redemption. This is

were appreciated property. In this situation, the

To determine your original basis of mutual fund

explained further under

Gains and

Losses, later.

basis of the inherited shares is the decedent’s

shares you acquired by gift, you must know:

adjusted basis in them immediately before his or

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

•

The donor’s adjusted basis,

her death, rather than their FMV.

for money only.

•

This basis rule also applies if the decedent’s

The date of the gift,

Exchange. An exchange is a transfer of

estate (or a trust of which the decedent was the

•

The fair market value (the last quoted pub-

shares in return for other shares.

grantor) sells the shares instead of distributing

lic redemption price) of the shares at the

them to you, and you are entitled to the pro-

Redemption. A redemption occurs when a

time of the gift, and

ceeds.

fund reacquires its shares from you in exchange

•

Any gift tax paid on the gift of the shares.

for money or other property.

Appreciated property. Appreciated prop-

erty is any property (including mutual fund

Recordkeeping. When there is a sale,

shares) whose FMV is more than its adjusted

Fair market value less than donor’s adjusted

exchange, or redemption of your

basis.

basis. If the fair market value (FMV) of the

shares in a fund, keep the confirmation

RECORDS

shares at the time of the gift was less than the

statement you receive. The statement shows

Exceptions. This basis rule does not apply

adjusted basis to the donor at the time of the gift,

the price you received for the shares and other

if the decedent died before 1982 or you gave the

your basis for gain on their disposition is the

information you need to report gain or loss on

shares to the decedent before August 14, 1981.

donor’s adjusted basis. Your basis for loss is the

your return.

FMV of the shares at the time of the gift. In this

Adjusted Basis

Exchange of shares in one mutual fund for

situation, it is possible to sell the shares at

neither a gain nor a loss because of the basis

shares in another mutual fund. Any ex-

After you acquire mutual fund shares, you may

change of shares in one fund for shares in an-

you have to use.

need to make adjustments to your basis. The

other fund is a taxable exchange. This is true

adjusted basis of your shares is your original

Example. You are given mutual fund shares

even if you exchange shares in one fund for

basis (defined earlier), increased or reduced as

with an adjusted basis of $10,000 at the time of

shares in another fund within the same family of

described here.

the gift. The FMV of the shares at the time of the

funds. Report any gain or loss on the shares you

gift is $9,000. You later sell the shares for

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

Addition to basis. Increase the basis in your

$9,500. The basis for figuring a gain is $10,000,

which the exchange occurs. Usually, you can

shares by the difference between the amount of

so there is no gain. There also is no loss, since

add any service charge or fee paid in connection

undistributed capital gain you include in income

the basis for figuring a loss is $9,000. In this

with an exchange to the cost of the shares ac-

and the tax considered paid by you on that

situation, you have neither a gain nor a loss.

quired. For an exception, see

Commissions and

income.

load charges

under

Shares Acquired by

Fair market value equal to or more than do-

The mutual fund reports the amount of your

Purchase, earlier.

nor’s adjusted basis. If the FMV of the

undistributed capital gain on Form 2439, box 1a,

shares at the time of the gift was equal to or

and any tax paid by the mutual fund in box 2.

Information returns.

Mutual funds and bro-

more than the donor’s adjusted basis at the time

You should keep Copy C of all Forms 2439 to

kers must report proceeds from sales, ex-

of the gift, your basis is the donor’s adjusted

show increases in the basis of your shares.

changes, or redemptions to the Internal

Publication 564 (2009)

Page 5

Publication 564 - Mutual Fund Distributions - Internal Revenue Service - 2009 Page 5

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