Frequently Asked Tax Questions And Answers
Keyword: Average Costs
10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
Can the cost averaging method be used for calculating the cost basis of
stocks, or is it limited only to mutual fund shares?
The average basis method may be used only for mutual fund shares that were purchased
at various times for various prices if the shares are left in the custody of a custodian
or agent in an account maintained for the acquisition or redemption of the shares.
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10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
If I previously sold shares of a mutual fund and reported the gains or losses
using the FIFO method, can I switch to an average basis method?
Yes, you can. The only requirement for using an average basis is that you acquired
the shares at various times and prices, and you left the shares on deposit in an account
handled by a custodian or agent who acquires or redeems those shares. An average basis
method, once adopted, must be disclosed on your tax return and the method cannot be
changed back without permission from the Commissioner of the Internal Revenue Service.
Before computing the basis of shares sold using an average basis, ensure that you
have reduced your previous total basis by the cost of the shares accounted for using
the FIFO method.
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If I previously reported my mutual fund sales using the FIFO method and
switched to an average basis method, do I include only those shares remaining after
the previous sales to determine the average cost?
Yes. You would include in your average basis calculations only those shares that
were still held at the time of the sale you are reporting.
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How do I calculate the average basis for the sale of mutual fund shares?
In order to figure your gain or loss using an average basis, you must have acquired
the shares at various times and prices and have left them on deposit in a managed
account.
There are two average basis methods:
Single-category method, and
Double-category method.
Single-category method. First, add up the cost of all the shares you own in the
mutual fund. Divide that result by the total number of shares you own. This gives
you your average per share. Multiply that number by the number of shares sold.
Double-category method. First, divide your shares into two categories, long-term
and short-term. Then use the steps above to get an average basis for each category.
The average basis for that category is then the basis of each share in the sale from
that category.
Once you elect to use an average basis method, you must continue to use it for
all accounts in the same fund. You must clearly identify on your tax return the average
basis method that you have elected to use. You do this identification by including
"AVGB" in column (a) of Form 1040, Schedule D (PDF) .
Refer to Publication 564 , Mutual Fund Distributions, Sales,
Exchanges and Redemptions .
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If I own some mutual fund shares less than a year and other shares more
than a year, do I need to do two separate computations for an average basis method?
If you are electing or have previously elected to use the double-category method
for that mutual fund, you need to do two separate computations; one for long-term
and one for short-term-only. The single-category method requires only one computation
of average basis.
For more information, refer to Publication 564, Mutual Fund Distributions, Sales, Exchanges, and Redemptions.
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How do I tell the IRS I used an average basis method in reporting the gain
or loss from my mutual funds?
Either write the name of the average basis method used as a notation on Form 1040, Schedule D (PDF), Capital Gains and Losses ,
or attach a sheet to the Schedule D showing in detail how you computed the basis of
the shares sold. Whenever you attach a statement to your return, include your name(s)
and social security number(s). Also include "AVGB" in column (a) of Schedule D.
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If I used an average basis method for shares of one mutual fund I sold,
do I have to use it for all mutual funds I sell?
No, you may use a different method, as long as you have not used an average basis
method for that fund previously. Once you have elected to use an average basis method
to compute the gain or loss on shares in a mutual fund, you must use that same method
for the sale of shares from any account in that same fund.
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If I use an average basis method for computing basis of mutual fund shares
upon sale, how do I determine the holding period for those shares?
How you determine the holding period of mutual fund shares you sold depends on
which of the two average basis methods you are electing to use. Once you have elected
a method, you must use that method for determining the basis of any shares sold in
the future from that fund.
You may specify top your broker the category from which the deemed shares are sold.
Shares will be deemed sold from that category so long as your broker provides you
with confirmation of the sale. If you do not specify or if the broker fails to provide
confirmation shares will be deemed sold first from the long-term category.
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After the first partial sale of mutual fund shares, are the sold shares
no longer used when updating an average basis method for future sales?
If you used the single-category method, the average per-share basis is the same
for the shares you still hold as the ones you sold. The next time you sell shares,
the per-share basis will remain the same unless you acquired additional shares in
the meantime.
If you subsequently sell some shares and have acquired additional shares since
the last sale, you recompute the average basis. Divide the total cost of the shares
that you hold at the time of sale by the number of shares you hold at the time of
sale.
If you previously used the double-category method to compute an average basis,
you need to transfer from the short-term category to the long-term category any shares
that have been held longer than one year at the time of a subsequent sale. Transfer
the shares at the per-share basis for the short-term category computed at the time
of the last sale, then recompute the average basis for the two categories. Use the
new total cost and total number of shares for each category.
For more information, refer to Publication 564, Mutual Funds.
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How do I calculate the average cost method of a mutual fund if the fund
price splits?
If your mutual fund splits, or adjusts its price, it is treated like a stock split.
Your total basis doesn't change after the split, but since you now own more shares
without paying any more money, your per-share basis will decrease. To calculate your
per-share basis, divide the total cost that you have invested in the fund (minus any
shares previously sold) by the current number of shares that you hold.
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What affect does a stock split for a stock in my mutual fund have on my
cost basis when I am using an average basis method?
If a stock within your mutual fund splits, it has no affect on your basis because
the shares you own are shares in the mutual fund, not in the stock that split.
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How do I receive permission to change my cost basis calculation to adopt
an average basis method?
You do not need permission to elect an average basis method for a particular mutual
fund when you have used a cost basis previously to report the sale of shares in the
fund. If you meet the conditions to use an average basis, then you just need to clearly
indicate on the return for which you want the election to be in effect that you are
making the election. You also need to indicate which average basis method you are
using and that none of the shares are gift shares. If there are gift shares in the
account and the fair market value of the shares at the time of the gift was not more
than the donor's basis, you must include a statement that the basis for gift shares
when figuring the average basis is the fair market value at the time of the gift.
If you have already reported the sale using a cost basis, you cannot make this
election unless you can do it on an amended return before the due date of the tax
return being amended.
However, you do need the consent of the IRS to use a cost basis or to change your
average basis method once you have made this election to use an average basis method.
This would be considered a change in an accounting method. You would need to request
consent to change your method on Form 3115 (PDF), Application
for Change in Accounting Method.
For more information, refer to Publication 564, Mutual Fund Distributions, Publication 538, Accounting Periods and Methods,
Instructions for Form 3115, Application for Change in Accounting Method, Revenue Procedure
97-27, and Section 9.03 of Revenue Procedure 2003-1.
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