Inherited Stock

[JG EA]

I have been keeping a running excel file for a client who inherited stock years ago. Within the investment they have been selling stock once a month for years to create an income for this client.

They also have been converting the stock into other funds continuously. These are not sales, just switching the stock from one to another. This year on the latest conversion from one to another they sold the monthly stock and started giving a cost basis.

My question is they show these sales each month from this last fund as short term. Can that possibly be right? I've always reported these monthly sales as long term since there has been no purchases since my client inherited the stock.

[Koss]

Terminology

I'm not sure exactly what you mean by "converting" or "switching." And I'm not sure what you mean by "other funds."

If they are "exchanging" shares from one mutual fund to another, that's a sale, and it's a taxable event. Same goes for individual stocks. It doesn't matter whether you call it an exchange, a conversion, a transfer, a switch, or a "re-balance," or whatever... The bottom line is that the taxpayer sold one asset and purchased a different one.

There are some very rare and very weird exceptions... such as convertible bonds, which are bonds that can be "converted" into shares of stock. Or certain mutual funds that have multiple "classes" of shares, and might allow an investor to "convert" from Class A to Class B, or something like that. Those types of transactions play by slightly different rules.

But if they sold the original asset, and used the money to buy something else, that is totally unrelated to the original asset, and which they were not obligated to buy, then the simple fact is that they sold the stock. They should get a 1099-B, and it should be reported on Schedule D. What they did with the money after they sold it is irrelevant.

The only other obvious exception that comes to mind would be if the original assets were inside an inherited IRA or something...

BMK

[JG EA]

No, no sales.. (Except for the sales of $600 or $500 a month within the various classes).

These are within a family of funds and there are no sales when converted (their word not mine) to another class within this family of funds.

The 1099-B only shows the sales of 13.62 shares or 48.834 shares or however many shares are sold to create the $500 or $600 needed for the month.

My question is why they show short term holding period? There has never been any basis before because they didn't know the basis. Now they are showing basis and short term. No purchases to warrant the short term. No sales either into this class, just the normal converting that has been going on for years.
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I am editing this instead of moving it to the top. Not interesting enough for that. But I called today and the reason that the last fund this client's investment was moved to is short term is because all the the value of the final funds are now from reinvested dividends and reinvested capital gains. It no longer is from the original inherited stock. So, I'm glad they did this. Although I have been keeping careful track of the cost basis, I will have to review previous years and see if I put too much into long term. It has been losses for years so it won't matter much, except to move a few long term losses into short term losses. But I actually think this is happening for the first time. Because I could tell from the basis left whether it came from reinvestments or from original basis. It is also encouraging that the basis they show is very, very close to my excel reports.