Calculating tax due on Mutual Fund sale

[Sunset]

I'm looking ahead a couple of months as we sold a couple of mutual funds
Thankfully we sold the entire amount in each one, so there is not a partial sale complication.

Unlike ETFs or stocks, it turns out the calculations on MF sale is complex.

Beginning in the tax year 2012, the IRS requires MF companies and brokers to track and report to you the capital gains from 2012 onwards.
But if you have a MF from 2004, it could easily be up to the individual to know the capital gains (plus re-invested dividends).

What makes this extra tricky is the individual already paid taxes each year on the declared dividends and capital gain, yet the final sale price of the MF is not really connected to the cumulative CG and dividends.

Now the IRS will take average, FIFO, and some other method, but I don't know which is better or even easier.

Is there an excel spreadsheet of this type of calculation or suggestions ?

 

[audreyh1]

I'm looking ahead a couple of months as we sold a couple of mutual funds
Thankfully we sold the entire amount in each one, so there is not a partial sale complication.

Unlike ETFs or stocks, it turns out the calculations on MF sale is complex.

Beginning in the tax year 2012, the IRS requires MF companies and brokers to track and report to you the capital gains from 2012 onwards.
But if you have a MF from 2004, it could easily be up to the individual to know the capital gains (plus re-invested dividends).

What makes this extra tricky is the individual already paid taxes each year on the declared dividends and capital gain, yet the final sale price of the MF is not really connected to the cumulative CG and dividends.

Now the IRS will take average, FIFO, and some other method, but I don't know which is better or even easier.

Is there an excel spreadsheet of this type of calculation or suggestions ?

Depending on your brokerage they may have tracked basis for you even with pre-2012 shares. I know Fidelity does.

The basis only gets complicated if you reinvested distributions. Otherwise it's just like stocks.

If you sold all shares in a given account the basis method won't matter.

Technically you must identify which basis method was used during the sale or live with the default method used by the brokerage. But since all shares were sold, this doesn't matter.

 

[LOL!]

The cost basis is what one paid for the shares. Since all the shares were sold, the cost basis method does not matter since the cost basis will be the same with all the methods.

I think you have psyched yourself out into thinking the cost basis calculation will be complex. All you have to do is add up the cost of every time you bought shares. You bought shares whenever you bought shares and that includes shares that you bought with reinvested distributions and reinvested dividends and reinvested capital gains. That is, if you reinvested dividends, that is exactly like getting money and turning around and buying shares with the money. How could it not be?

So mutual funds cost basis is exactly like the cost basis of stocks and ETFs. If you got an ETF dividend and used it to buy more ETF shares that is the same as mutual funds reinvesting dividends.

So relax about this. Just use your annual statements and add up the cost. You can double-check by also adding up the total number of shares you bought over the years. It should match the number of shares you sold exactly.

For all your mutual funds, set the cost basis method to Specific Identification. That is the most common sense method and is best for tax-loss harvesting purposes. In the sales you made, you can say that you specifically identified that you wanted ALL shares sold. There was probably a button or text entry for "100%" or "All shares" when you sold.

 

[walkinwood]

As LOL! says, this is not complex. Gather all your statements or transaction details and google it. It is quite easy to do. I remember being equally confused when I first had to do this many years ago in the pre-tax software days.

 

[Rothman]

Sunset, I think the complication you are thinking of is when the mutual fund takes capital gains they must distribute them to fund owners, that is complicated and it can be bad timing for fund owners, this is an advantage of stock ownership where you decide when to take capital gains. When you sell all shares the basis is a straight forward comparison to purchase prices for those shares accounting for any splits. ETFs have similar tracking no big worry.


Sent from my iPad using Early Retirement Forum

 

[MBAustin]

My view is that it's more tedious than complicated. I built an enormous spreadsheet a few years ago to calculate the cost basis in two mutual funds that I invested in monthly (automatic investment) for several years back in the 80's-90's - between all of the investments plus the CG distributions over the years that were also reinvested, it was a bear. Fortunately, I had nearly all of the statements so it was mostly just a lot of typing. I was missing a couple of statements but was able to get the CG distribution data from the company and the historical share prices from Yahoo.

It was definitely worth it as when I sold one of them during the great recession, there was a lot less tax due as the taxes had already been paid on all of the distributions over the years. Still have the other one, though I started taking all CGs and dividends in cash once I built the spreadsheet so the cost basis won't change again.

 

[easysurfer]

I go with the average basis all the way. Makes things easier I think.

 

[LOL!]

I go with the average basis all the way. Makes things easier I think.

Do you calculate it yourself? Mutual fund companies have been known to get it wrong.

But, once one has only "covered" shares, then brokerages and mutual funds companies really do have to track these things, so all methods become trivial. It is pretty clear that Specific Identification is best if one is going to do any Tax-Loss Harvesting.

Also if one owns stocks and ETFs, why learn a 2nd method for use with mutual funds when one only need to learn one method?

But for the OP, average basis should lead to the same exact number since they sold all shares.

 

[RunningBum]

Depending on your brokerage they may have tracked basis for you even with pre-2012 shares. I know Fidelity does.

^^ this. I've sold from 3 or 4 mutual fund companies and brokerages and I don't think I've ever had to figure this out for myself, as long as I was willing to go with the method they reported to me. And since you're selling all shares, you don't care about the method.

If they don't report it to you, it's a matter of gathering all the paperwork (online or actual paper forms) and adding up all of your purchases, including CG/Div reinvestments if you did that. On schedule D of your tax return, you can put "various" as your purchase date and group all of those pre-2012 shares together since they are all long term. Finding the information is the only part I'd consider tricky. As long as you have it all, it's just adding up the numbers.

 

[stepford]

I go with the average basis all the way. Makes things easier I think.

As do I - now. Unfortunately about 20 years ago I did a partial sale of a fund. Worse yet I chose to identify individual shares to sell (I was young and foolish). I just finally sold the remainder of the shares last year. I have all the statements, but calculating the cost basis is a real mess and I dread filling out this year's tax return.

 

[RunningBum]

I go with the average basis all the way. Makes things easier I think.

Now that they have to report the basis to the IRS using whichever method you instruct, I don't think it's any easier to use average cost over other methods post-2012. I really prefer SpecID as I can potentially limit gains or do tax loss harvesting or even take more gains if I decide that's beneficial for some reason. It also avoids averaging in short term gains. Also, once you start on average cost for a holding you are stuck with it, so it is the most limiting.

For those reasons I think average basis is now the worst method to use. It always was, really, but the simplicity of using it when that was what the fund company reported to you certainly made it easier and I went with it too. It probably doesn't make that much difference in the long run, but I try to optimize anything I can. If I can defer bigger gains or even pass them to my heirs who will get stepped up basis, I'll come out ahead.

 

[Sunset]

I'm feeling a bit relieved due to everyone's advice.

Correct me if I'm wrong, but since we sold the MF all at one time, all we need to do is add up all the purchases + dividends reinvested (all) + capital gains reinvested (all) and divide that by the number of total shares.

This will give me the cost basis (averaged) per share.
Then I can calculate the capital gain.

What do I do with all the paid taxes over the years on the capital gain and re-invested dividends, or just ignore them as it's like having been paid cash and then bought more of the MF ?

 

[LOL!]

Just ignore past taxes paid as they have nothing to do with capital gains this past year.

You don't have to "divide by that by the number of total shares" as the cost per share does not go on your tax forms.

You probably won't even have to worry about long-term vs short-term gains as your 1099-B will do that for you since all the short-term shares are "covered".

 

[RunningBum]

Right, you add up all the purchases, including from reinvestments. That is your basis. Subtract that from the proceeds of your sale. That is your capital gain. Schedule D only asks you for the total basis, proceeds, and cap gain of the sale, along with the sale date and purchase date (which is "various").

Forget the past taxes paid. It's done. This is why you are adding the reinvestments to your basis, because you've already paid the taxes on that.

 

[scrabbler1]

I have a spreadsheet for each MF I own and part of includes a calculation to determine the cost basis (I use FIFO) whenever I sell any shares (which is quite rare). This part of the spreadsheet is handy in case I want to do any what-ifs when trying to decide if I should sell any shares.


When selling shares, I use the permitted term, "Various" when grouping purchases together on Form 8949 which had the same sale date and cap gains type (Long Term versus Short Term). I then post the range of dates.


Interestingly, and on a friend's tax return I will be preparing next year, he had a monthly sale order for one MF so I plan on using the term, "Various" for the sale date when grouping sales together which had the same purchase date and cap gains type. Anyone here ever do this without being questioned? I figure as long as all the main numbers on the appropriate tax forms match those in the 1099s, it should be fine.

 

[audreyh1]

I go with the average basis all the way. Makes things easier I think.

I've pretty much switched all my mutual fund shares over to specified shares basis. I can choose higher cost basis shares when I rebalance, and I can choose lowest cost basis shares when I gift mutual fund shares to my DAF.

This made a big difference on my taxes the past two years.

 

[LOL!]

Interestingly, and on a friend's tax return I will be preparing next year, he had a monthly sale order for one MF so I plan on using the term, "Various" for the sale date when grouping sales together which had the same purchase date and cap gains type. Anyone here ever do this without being questioned? I figure as long as all the main numbers on the appropriate tax forms match those in the 1099s, it should be fine.

I have not done that, but maybe the 1099-B will download into tax software without issue and you won't even have to mess with that.

The IRS instructions do discuss the use of "Various" for the "Date Acquired", so what do the instructions say about "Date Sold"?

 

[kaneohe]

...........................

When selling shares, I use the permitted term, "Various" when grouping purchases together on Form 8949 which had the same sale date and cap gains type (Long Term versus Short Term). I then post the range of dates.


Interestingly, and on a friend's tax return I will be preparing next year, he had a monthly sale order for one MF so I plan on using the term, "Various" for the sale date when grouping sales together which had the same purchase date and cap gains type. Anyone here ever do this without being questioned? I figure as long as all the main numbers on the appropriate tax forms match those in the 1099s, it should be fine.

https://apps.irs.gov/app/vita/conte..._d_capital_gain_or_loss_transactions_4012.pdf

see note 1): your first paragraph above is the approved method.....group by sell date.

If your broker summarizes your transactions on a substitute 1099-B w/ all the relevant detail, you could report just the bottom line summary with 2 lines (ST and LT). However,if the shares are non-covered, the IRS will not get basis info so you would have to provide the detail as a supplemental attachment.

If the detail is not provided and you use various for buy (instead of sell) date,
that could be a flag to IRS but if you have all the supporting info, the only consequence would be your time to respond to possible IRS queries.