Publication 564 - Mutual Fund Distributions - Internal Revenue Service

Adjusted basis. Adjusted basis is explained

Determining period held. Determine your

Enter the number of shares you

under

Keeping Track of Your

Basis, earlier. Also

holding period by using the trade dates of your

sold . . . . . . . . . . . . . . . . . . . . .

see the explanations of cost basis and average

purchases and your sales. The trade date is the

Multiply the amount on line 3 by

basis under

Identifying the Shares

Sold, earlier.

date on which you contract to buy or sell shares.

the amount on line 4. This is the

Most mutual funds will show the trade dates on

Wash sales. If you sell mutual fund shares at

basis of the shares you sold . . . $ 750

confirmation statements showing your

a loss and within 30 days before or after the sale

purchases and sales.

you buy, acquire in a taxable exchange, or ac-

D o u b l e - c a t e g o r y

m e t h o d .

I n

t h e

Do not confuse the trade date with the

quire a contract or option to buy substantially

double-category method, all shares in an ac-

settlement date, which is the date by

identical shares, you have a wash sale. You

count at the time of each disposition are divided

which the mutual fund shares must be

cannot deduct losses from wash sales.

CAUTION

into two categories: short term and long term.

delivered and payment must be made.

Substantially identical. In determining

Shares held 1 year or less are short term.

To find out how long you have held your

whether the shares are substantially identical,

Shares held longer than 1 year are long term.

shares, begin counting on the day after the trade

you must consider all the facts and circum-

The basis of each share in a category is the

date on which you bought the shares. (Do not

stances. Ordinarily, shares issued by one mu-

average basis for that category. This is the total

count the trade date itself.) The trade date on

tual fund are not considered to be substantially

remaining basis of all shares in that category at

which you dispose of the shares is counted as

identical to shares issued by another mutual

the time of disposition divided by the total shares

part of your holding period.

fund.

in the category at that time. To use this method,

For more information on wash sales, see

you specify, to the custodian or agent handling

Example. If you bought shares on January

Publication 550.

your account, from which category the shares

7, 2008 (trade date), and sold them on January

are to be sold or transferred. The custodian or

Reporting information from Form 1099-B.

7, 2009 (trade date), your holding period would

agent must confirm in writing your specification.

Mutual funds and brokers report dispositions of

not be more than 1 year. If you sold them on

If you do not specify or receive confirmation, you

mutual fund shares on Form 1099-B, or a substi-

January 8, 2009, your holding period would be

must first charge the shares sold against the

tute form containing substantially the same lan-

more than 1 year (12 months plus 1 day).

long-term category and then charge any remain-

guage. The form shows the amount of the sales

ing shares sold against the short-term category.

Mutual fund shares received as a gift. If you

price and indicates whether the amount reported

receive a gift of mutual fund shares and your

is the gross amount or the net amount (gross

Changing categories. After you have held

basis is determined by the donor’s basis, your

amount minus commissions).

a mutual fund share for more than 1 year, you

holding period is considered to have started on

If your Form 1099-B or similar statement

must transfer that share from the short-term

the same day that the donor’s holding period

from the payer shows the gross sales price, do

category to the long-term category. The basis of

started.

not subtract the expenses of sale from it when

a transferred share is its actual cost or other

reporting your sales price in column (d) on

basis to you unless some of the shares in the

Inherited mutual fund shares. If you inherit

Schedule D (Form 1040). Instead, report the

short-term category have been disposed of. In

mutual fund shares, you are considered to have

gross amount in column (d) and increase your

that case, the basis of a transferred share is the

held the shares for more than 1 year, regardless

cost or other basis, column (e), by any expense

average basis of the undisposed shares at the

of how long you actually held them. Report the

of the sale. If your Form 1099-B shows that the

time of the most recent disposition from this

sale of inherited mutual fund shares on Sched-

gross sales price less commissions was re-

category.

ule D (Form 1040), line 8, and enter “Inherited”

ported to IRS, enter the net amount in column

in column (b) instead of the date you acquired

(d) of Schedule D (Form 1040) and do not in-

Making the choice. You choose to use the

the shares.

crease your basis in column (e) by the sales

average basis of mutual fund shares by clearly

commission.

showing on your income tax return, for each

Reinvested distributions. If your dividends

year the choice applies, that you used an aver-

and capital gain distributions are reinvested in

Example 1. You sold 100 shares of Fund

age basis in reporting gain or loss from the sale

new shares, the holding period of each new

HIJ for $2,500. You paid a $75 commission to

or transfer of the shares. You must specify

share begins the day after that share was pur-

the broker for handling the sale. Your Form

whether you used the single-category method or

chased. Therefore, if you sell both the new

1099-B shows that the net sales proceeds,

the double-category method in determining av-

shares and the original shares, you might have

$2,425 ($2,500 − $75), were reported to the IRS.

erage basis. This choice is effective until you get

both short-term and long-term gains and losses.

Report $2,425 in column (d) of Schedule D

permission from the IRS to revoke it.

Certain short-term losses. Special rules may

(Form 1040).

Shares received as gift. If your account

apply if you have a short-term loss on the sale of

includes shares that you received by gift, and

Example 2. You sold 200 shares of Fund

shares on which you received an ex-

the fair market value of the shares at the time of

empt-interest dividend or a capital gain distribu-

KLM for $10,000. You paid a $100 commission

the gift was not more than the donor’s basis,

at the time of the sale. You bought the shares for

tion.

special rules apply. You cannot choose to use

$5,000. The broker reported the gross proceeds

Exempt-interest dividends before

the average basis for the account unless you

to IRS on Form 1099-B, so you enter $10,000 in

short-term loss.

If you received ex-

submit a statement with your initial choice. It

column (d) of Schedule D (Form 1040) and in-

empt-interest dividends on mutual fund shares

must state that the basis used in figuring the

crease your basis in column (e) to $5,100.

that you held for 6 months or less and sold at a

average basis of the gift shares will be the FMV

loss, you may claim only the part of the loss that

at the time of the gift. This statement applies to

Note. Whether you use line 1 (for a

is more than the exempt-interest dividends. On

gift shares received before and after making the

short-term gain or loss) or line 8 (for a long-term

Schedule D (Form 1040), column (d), increase

choice, as long as the choice to use the average

gain or loss) of Schedule D (Form 1040) de-

the sales price by the amount of exempt-interest

basis is in effect.

pends on how long you held the shares, dis-

dividends, but do not increase it to more than the

cussed next.

cost or other basis shown in column (e). Report

Gains and Losses

the loss as a short-term capital loss.

Holding Period

You figure gain or loss on the disposition of your

Example. On January 7, 2009, you bought

shares by comparing the amount you realize

a mutual fund share for $40. On February 4,

When you dispose of your mutual fund shares,

with the adjusted basis of your shares. If the

2009, the mutual fund paid a $5 dividend from

you must determine your holding period. Your

amount you realize is more than the adjusted

tax-exempt interest, which is not taxable to you.

holding period determines whether the gain or

basis of the shares, you have a gain. If the

On February 11, 2009, you sold the share for

loss is a short-term capital gain or loss or a

amount you realize is less than the adjusted

$34. If it were not for the tax-exempt dividend,

long-term capital gain or loss.

basis of the shares, you have a loss.

your loss would be $6 ($40 − $34). However,

Short-term gain or loss. If you hold the

you must increase the sales price from $34 to

Amount you realize. The amount you realize

shares for 1 year or less, your gain or loss will be

$39 (to account for the $5 portion of the loss that

from a disposition of your shares is the money

a short-term gain or loss.

is not deductible). You can deduct only $1 as a

and value of any property you receive for the

short-term capital loss.

shares disposed of, minus your expenses of

Long-term gain or loss. If you hold the

sale (such as redemption fees, sales commis-

shares for more than 1 year, your gain or loss

Capital gain distribution before short-term

sions, sales charges, or exit fees).

will be a long-term gain or loss.

loss. Generally, if you received capital gain

Page 8

Publication 564 (2009)

Publication 564 - Mutual Fund Distributions - Internal Revenue Service - 2009 Page 8

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