Cost basis when redeeming *all* mutual fund shares...

[jimsmith]

Hypothetical situation:

1--You opened a mutual fund account 15 years ago with an initial purchase of XX dollars.
2--You have reinvested all dividends and cap-gains distributions
3--You have not purchased any additional shares *except* for the dividend/cap-gains distributions.
4--You now want to sell all shares and liquidate the account.

Does it matter what cost basis you choose? Average cost, FIFO, specific identification, etc--does it make any difference if you sell everything?

I have sold mutual fund shares *in a different account* in a different fund company, using the average cost method, and on the 1099 form it shows a single average-cost price.

But what if you chose FIFO? Would the 1099 form show a long list of different purchase prices for every reinvestment of the dividends and cap-gains, stretching back over 15-years?

Thanks for info!

[seattlecyclone]

The total cost basis of all your shares is the same regardless of which method you choose. The total sale price is the same too. Therefore all cost basis methods should result in identical tax when you sell all shares, so pick whichever one you think is likely to result in the least amount of paperwork.

Do be aware that your broker wasn't required to keep track of cost basis for you 15 years ago, so you should verify that they actually have a cost basis listed and that it is identical to what it should be based on your own records.

[jimsmith]

The total cost basis of all your shares is the same regardless of which method you choose. The total sale price is the same too. Therefore all cost basis methods should result in identical tax when you sell all shares, so pick whichever one you think is likely to result in the least amount of paperwork.

Do be aware that your broker wasn't required to keep track of cost basis for you 15 years ago, so you should verify that they actually have a cost basis listed and that it is identical to what it should be based on your own records.

Thanks--that's more-or-less what I thought.

But still have this Q: My "default" assigned cost basis for the fund in question is FIFO. I know that on the 1099 form, average-cost will give me a single figure for the fund-share price [because I've used avg cost in a different fund at different fund company]; but what does the 1099 form show for FIFO basis? If it's a long complicated list showing each dividend/capgain reinvestment, maybe I should *change* my cost basis to average cost--even though tax will be identical, it might make paperwork easier--??

Note: this does not involve a broker--this was direct purchase by me.

[secondcor521]

As far as I know, the 1099 will just show the totals regardless of which method you use.

Also, the 1099 will almost certainly *not* show the basis.  Historically, it was up to the investor (you) to keep track of your basis.  Yes, including all those documents showing that you reinvested dividends over the last 15 years.  (You are allowed to estimate if you've lost your records.  You are also always allowed to ignore your reinvested dividends and just claim a basis equal to your original purchase, however that would generally not be recommended because you would overpay your taxes, possibly dramatically.)

In the last few years, the rules have changed, and the investment companies are required to keep track of your basis.  But if you've invested over the past 15 years, you certainly would have shares that are not covered under the new rules, so you'd have to do it yourself anyway if you wanted it done correctly if you do go ahead and sell all of the shares.

[JJ-]

Jim,

I'm pretty much in the same situation as you. I posted and included a spreadsheet with how I calculated the cost basis thing for a sale of all mutual funds for something I've held for like 20 years. Feel free to PM me with questions. There was a sale of some of the funds back in 2006, so that is why some of the "gains" listed are 0. Yours would be for the entire holding period if you didn't sell.

[triangle]

I do not disagree with @seattlecyclone or @secondcor521. For shares continually bought over 15 years and then sold all at once I would expect the broker to report a single sell to you and the IRS with either a) unknown or zero cost basis for the whole lot or b) total cost basis a combination of what it was required tracked by law with zero basis for all the shares it did not track or c) some hybrid of the first two cases where it breaks the transaction into two separate parts.

I have only bought should ETF/stocks in a taxable account not mutual fund shares, but my main doubt about the FIFO question is that the portion which was held for less than one year needs to be broken out separately in your tax return so that it can be taxed as a short term gain/loss, leaving the remainder as a long term transaction(s).  But to your point about averaging that long term basis portion, it should be easier to combine and report that as a single transaction instead of lots of little buy/sells.

[jimsmith]

Much thanks to all for excellent info--

[secondcor521]

I have only bought should ETF/stocks in a taxable account not mutual fund shares, but my main doubt about the FIFO question is that the portion which was held for less than one year needs to be broken out separately in your tax return so that it can be taxed as a short term gain/loss, leaving the remainder as a long term transaction(s).

This is correct as well.  An annoying thing to have to do, but ST is taxed differently from LT.  I had forgotten about that point.

[koralcem]

I'm warned this thread is old, but I have a very similar situation so still choosing to ask here.

Turns out DW has a $19K position in PTHAX, which is a bond fund with a 0.83% ER. I considered selling it and getting her into Vanguard funds, but she's in a similar boat as the OP.

- Way back in the late 90's, grandma wanted to give her a gift so she could stay in a certain tax bracket. She opened a brokerage account in her name, put a little less than $9000 in it (which I'm told was the gift limit back then), and invested all of it in PTHAX.
- All dividends and gains have been reinvested since.
- No other purchases have been made except reinvestments.
- We now want to sell all shares, but aren't clear what we'd claim as the cost basis.

Some pieces of the puzzle are:
- DW swears the account started out in the late 90's, but the exact date isn't known.
- DW also swears that the initial amount was something like $8900, but the precise amount isn't known.
- There are some statements that survived. They start from March 2003 onwards, but aren't continuous; there are some months missing at times.
- It looks like the assets got transferred twice during their lifetime. They ended up at Fidelity in 2011, who has a cost basis for reinvested amounts from 2012 onwards. But they don't show a basis for 2011 - 2012. And at the very bottom of the cost basis list they just show a single ~$15K transaction for incoming assets with an unknown basis.

Any opinions on how to move forward? Specifically how we'd report the sale on our taxes with this info, and/or how we'd chase down accurate cost basis info?

One option I read is to simply play it safe and claim a $0 basis. But then we'd be paying taxes on an apparent $19K gain, whereas the reality is more like $10K. The difference is significant enough to give me pause.

Can we be conservative and claim a basis of $8K (or something in that range) and pay taxes accordingly? Would it be a problem that we don't have any proof?

Also, the fund has been paying dividends monthly and getting reinvested. So when we sell, there will be a portion of shares that were less than 12 months old. Does this imply a part of this will be short term capital gains (pretty small part, but still), while the rest will be long term?

[MDM]

- We now want to sell all shares, but aren't clear what we'd claim as the cost basis.
...
Any opinions on how to move forward? Specifically how we'd report the sale on our taxes with this info, and/or how we'd chase down accurate cost basis info?
...
Can we be conservative and claim a basis of $8K (or something in that range) and pay taxes accordingly? Would it be a problem that we don't have any proof?

Do you have tax returns showing dividend/interest income from the late 90s through 2011?  If so you can use those to substantiate your basis claim. 

IANAL (so take this for what it's worth) but if you make a good faith, conservative effort to estimate the basis it is unlikely the IRS will have a problem with it.  E.g., you know the account was worth $15K in 2011 - what investment amount at the minimum fund price in the late 90s would have grown to $15K on the given date in 2011?

Also, the fund has been paying dividends monthly and getting reinvested. So when we sell, there will be a portion of shares that were less than 12 months old. Does this imply a part of this will be short term capital gains (pretty small part, but still), while the rest will be long term?

Yes.

[CupcakeGuru]

Last year I unloaded some stocks and mutual funds that I have had since the late 90's. A CPA friend told me about using a website called http://www.netbasis.com/ . It does the short term and long term calculations as well as splits and spinoffs.

It may be a little more difficult for you if you don't know the exact date. For 2 stocks, I knew the year I bought but not the exact date so I ended up picking a date when the price was high just to avoid the IRS challenging the #s.
 

[MDM]

It may be a little more difficult for you if you don't know the exact date. For 2 stocks, I knew the year I bought but not the exact date so I ended up picking a date when the price was high just to avoid the IRS challenging the #s.

If it is a small amount the IRS may not bother, but picking a date when the price was lower (so your gain and thus taxes would be higher) would have been a more conservative approach.

[secondcor521]

Any opinions on how to move forward? Specifically how we'd report the sale on our taxes with this info, and/or how we'd chase down accurate cost basis info?

One option I read is to simply play it safe and claim a $0 basis. But then we'd be paying taxes on an apparent $19K gain, whereas the reality is more like $10K. The difference is significant enough to give me pause.

Can we be conservative and claim a basis of $8K (or something in that range) and pay taxes accordingly? Would it be a problem that we don't have any proof?

Also, the fund has been paying dividends monthly and getting reinvested. So when we sell, there will be a portion of shares that were less than 12 months old. Does this imply a part of this will be short term capital gains (pretty small part, but still), while the rest will be long term?

Your cost basis is grandma's initial investment plus the dividends.

What I would do is claim $8900 plus whatever dividends you can substantiate from either 1099-DIV forms or brokerage statements.  If you are missing statements from certain periods of time, you could conservatively estimate it by figuring number of shares you had that year times the per share dividend figures from the mutual fund company.  You could also ask the brokerage company that held the shares for you during that period to see if they can provide you with the information.

Personally if you have a reason for believing that the initial investment is $8900, I think it is actually more conservative to use the $8900 figure to calculate basis rather than some lower $8000 number.  The more things are simple and make sense and you have a justification, the more likely the IRS is to accept your point of view.  For establishing the $8900 figure, you could ask grandma or her bank for the original check, or she might have saved bank statements from back then.  Since it is related to the gift limit, you could also probably look that up and buttress your argument that way.

Write yourself a note stating how you calculated your basis and file it with your taxes.  99+% of the time the IRS doesn't question it.  In the <1% of the time when they do, you share with them how you estimated it.  Most of the time, they will likely accept your estimate, especially if you made a reasonable effort to calculate it, which it sounds like you will be doing.  If they don't accept it (which could happen although I have never heard of it with an ordinary taxpayer), they may tack on some taxes and interest, but it won't be large and will likely not include any penalties.

Yes, you can always claim $0 basis, but your thinking is correct that you're way overpaying taxes if you do so.

The $15K number when you transferred the shares is irrelevant; that's just the value of the shares as of when they were transferred and has nothing to do with basis.  Basis is what you paid for the investment.

As to your last question, yes, the shares that were purchased in the last year will become a short term capital gain or loss when you sell.  What you will do is separate the shares into two lots:  one short-term capital gain or loss, and one long-term capital gain (<-probably) or loss.  The basis for each lot is how much you paid for each set of shares, and the gain is whatever you received per share pro-rated by the number of shares in each lot.

[CupcakeGuru]

It may be a little more difficult for you if you don't know the exact date. For 2 stocks, I knew the year I bought but not the exact date so I ended up picking a date when the price was high just to avoid the IRS challenging the #s.

If it is a small amount the IRS may not bother, but picking a date when the price was lower (so your gain and thus taxes would be higher) would have been a more conservative approach.

That's actually what I did. Thanks for catching my mistake. You never want to get on the bad side of the IRS!