Mutual fund cost basis

[rdo cpa]

How is a mutual fund supposed to track cost basis starting in 2012. A client keeps a worksheet from the inception on his mutual and calculates a running average cost basis from inception through the most current dividend reinvestment.

He received a notice from the fund saying they were tracking average cost basis only from after 12/31/11. I know that's all they are required to report to the IRS and customer but didn't know if that is the correct way to calculate basis especially if he sells all the shares. The overall gain or loss he calculates should be the same as what the fund calculates but there should be differences between short and long term and these could be substantial if the fund has been held for many years.

[Roberts]

I don't understand this at all.

There SHOULD be differences?
When they sell the fund, the long term gain or loss will be all that matters almost always. Or are they buying today and selling within a year?

[Burke]

Assume you mean client bought mutual fund years ago and has been tracking basis using ACM. Mutual fund, however, is only going to track starting in 2012 -- and this only applies to purchases and div reinv made in 2012 or after within this firm. So client is still going to have to track as he has always done, and just bring forward year to year until he liquidates the fund entirely. And he would use his records, not the firms', to show basis on sales.

[rdo cpa]

Mutual fund cost basis

The person has owned the fund for years and there are quarterly reinvestments. When they sell the fund, there will be long and short term gains/losses. For instance, they sell at the end of 2012 after receiving the 4 quarterly dividends that were reinvested. If the individual computes the average cost using the complete history of purchases and reinvestments and the fund is only using average cost since the beginning of 2012, the long and short term gains/losses they compute will be different although the overall gain/loss should be the same. This could make a difference depending on the individual's tax bracket.

[taxea]

It is admirable that the TP has kept purchase/cost records and these should be used in calculating the gain/loss on sales. That he keeps an averaged out log is good too. You have a choice of averaging the cost at sale or, if available, using the actual cost. Just remember on sale it is first in/first out.

[FEDUKE404]

Further wrinkle

Many folks DO use FIFO for tracking their gains/losses from mutual fund sales.

With the advent of IRS-mandated tracking, the mutual fund itself may be boxed in as to what/how it reports the cost basis of any dispositions.

And I seem to recall the starting date for IRS tracking of mutual fund purchases may have differed from same for "ordinary" stock which began at the start of 2011 ??

FE