Publication 564 - Mutual Fund Distributions Instructions

Table 3. How To Figure Basis of Shares Sold

Adjusted basis. Adjusted basis is explained

under Keeping Track of Your Basis, earlier. Also

This is an example showing two different ways to figure basis. It compares the cost basis using

see the explanations of cost basis and average

the FIFO method with the average basis using the single-category method.

basis under Identifying the Shares Sold, earlier.

Date

Action

Share Price

No. of Shares

Total Shares

Wash sales. If you sell mutual fund shares at

Owned

a loss and within 30 days before or after the

02/05/01

Invest $4,000

$25

160

sale you buy, acquire in a taxable exchange, or

acquire a contract or option to buy substantially

08/06/01

Invest $4,800

$20

240

400

identical shares, you have a wash sale. You

12/17/01

Reinvest $300

cannot deduct losses from wash sales.

dividend

$30

410

Substantially identical. In determining

09/30/02

Sell $6,720

$32

210

200

whether the shares are substantially identical,

you must consider all the facts and circum-

stances. Ordinarily, shares issued by one mu-

COST BASIS

To figure the basis of the 210 shares sold on 9/30/02, use the share

tual fund are not considered to be substantially

(FIFO)

price of the first 210 shares you bought, namely the 160 shares you

identical to shares issued by another mutual

purchased on 2/5/01 and 50 of those purchased on 8/6/01.

fund.

For more information on wash sales, get

$4,000 (cost of 160 shares on 2/5/01)

Publication 550.

+ $1,000 (cost of 50 shares on 8/6/01)

Reporting information from Form 1099 – B.

Basis= $5,000

Mutual funds and brokers report dispositions of

mutual fund shares on Form 1099 – B, or a sub-

AVERAGE BASIS

To figure the basis of the 210 shares sold on 09/30/02, use the

stitute form containing substantially the same

(single-category)

average basis of all 410 shares owned on 9/30/02.

language. The form shows the amount of the

sales price and indicates whether the amount

$9,100 (cost of 410 shares)

reported is the gross amount or the net amount

÷ 410 (number of shares)

(gross amount minus commissions).

$22.20 (average basis per share)

If your Form 1099 – B or similar statement

from the payer shows the gross sales price, do

not subtract the expenses of sale from it when

$22.20

reporting your sales price in column (d) on

× 210

Schedule D. Instead, report the gross amount in

column (d) and increase your cost or other ba-

Basis= $4,662

sis, column (e), by any expense of the sale. If

your Form 1099 – B shows that the gross sales

price less commissions was reported to IRS,

Double-category method. In the double-cat-

age basis in reporting gain or loss from the sale

enter the net amount in column (d) of Schedule

egory method, all shares in an account at the

or transfer of the shares. You must specify

D and do not increase your basis in column (e)

time of each disposition are divided into two

whether you used the single-category method or

by the sales commission.

categories: short-term and long-term. Shares

the double-category method in determining av-

held one year or less are short-term. Shares

erage basis. This choice is effective until you get

Example 1. You sold 100 shares of Fund

held longer than one year are long-term.

permission from the IRS to revoke it.

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

The basis of each share in a category is the

Shares received as gift. If your account

the broker for handling the sale. Your Form

average basis for that category. This is the total

includes shares that you received by gift, and

1099 – B shows that the net sales proceeds,

remaining basis of all shares in that category at

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

the fair market value of the shares at the time of

the time of disposition divided by the total shares

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

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

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

special rules apply. You cannot choose to use

you specify, to the custodian or agent handling

the average basis for the account unless you

Example 2. You sold 200 shares of Fund

your account, from which category the shares

submit a statement with your initial choice. It

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

are to be sold or transferred. The custodian or

must state that the basis used in figuring the

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

agent must confirm in writing your specifica-

average basis of the gift shares will be the FMV

$5,000. The broker reported the gross proceeds

tion. If you do not specify or receive confirma-

at the time of the gift. This statement applies to

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

tion, you must first charge the shares sold

gift shares received before and after making the

in column (d) of Schedule D and increase your

against the long-term category and then charge

choice, as long as the choice to use the average

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

any remaining shares sold against the

basis is in effect.

short-term category.

Note. Whether you use Schedule D’s line 1

Gains and Losses

Changing categories. After you have held

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

a mutual fund share for more than one year, you

long-term gain or loss) depends on how long you

must transfer that share from the short-term

held the shares, discussed next.

You figure gain or loss on the disposition of your

category to the long-term category. The basis of

shares by comparing the amount you realize

a transferred share is its actual cost or other

with the adjusted basis of your shares. If the

Holding Period

basis to you unless some of the shares in the

amount you realize is more than the adjusted

short-term category have been disposed of. In

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

When you dispose of your mutual fund shares,

that case, the basis of a transferred share is the

amount you realize is less than the adjusted

you must determine your holding period. Your

average basis of the undisposed shares at the

basis of the shares, you have a loss.

holding period determines whether the gain or

time of the most recent disposition from this

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

Amount you realize. The amount you realize

category.

long-term capital gain or loss.

from a disposition of your shares is the money

Making the choice. You choose to use the

and value of any property you receive for the

Short-term gain or loss. If you hold the

average basis of mutual fund shares by clearly

shares disposed of, minus your expenses of

shares for one year or less, your gain or loss will

showing on your income tax return, for each

sale (such as redemption fees, sales commis-

year the choice applies, that you used an aver-

sions, sales charges, or exit fees).

be a short-term gain or loss.

Page 8

Publication 564 - Mutual Fund Distributions Instructions - 2002 Page 8

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