audreyh1
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This applies to taxable accounts at Fidelity.
The IRS changed reporting rules for assets bought in 2012 and later. Assets bought before 2012 - a brokerage does not report the basis on the 1099, but for assets purchased 2012 and later, the brokerage does report the basis.
Due to this, my mutual funds instead of being treated as all one lot with an average basis, are split into two lots - a pre-2012 lot with one average basis, and a 2012 or later lot with a different, and considerably higher, average basis. All my bond funds, and about half my equity mutual funds have this situation. Most of my mutual fund shares are pre-2012, but there are enough shares purchased afterwards to make a difference when rebalancing.
By default, Fidelity uses average cost basis for mutual funds. If you had started out configured to use specific share basis, this is a non issue. But many folks are probably like me and just used the defaults. I also used to automatically reinvest distributions as I was building my retirement fund, but I stopped that practice several years ago.
So - the average basis method ended up being broken and if I sell some shares without paying attention, by default it will come out of the older lot with the often considerably lower cost basis. This caught me by surprise one time last year when I was trying to do some tax loss harvesting. And I ended up selling more of the fund to get the larger realized loss on the newer shares with the higher basis. This really hadn't been an issue until recently because I didn't have that many shares purchased after 2012 except for bond funds which I normally haven't been trimming.
So now, if I need to rebalance by selling a mutual fund, I first check my pre-post 2012 lot situation, and if there are any shares purchased after 2012 with a higher basis, I convert that fund from Average Share Method to Specific Share Method. This assigns the (pre and post 2012) average basis to each lot bought before and after 2012, but now you can sell specific shares. Future shares purchase will take on their own basis. When the IRS changed the 2012 reporting requirements, they also did away with the requirement to get IRS permission to switch from average to specific cost share method, and Fidelity now allows you to make this change online.
It's a bit tricky to do online at Fidelity - you actually initial a mutual fund sale, choose specific shares, are told you have to convert which kicks you out of the trade and on to a screen that lets you pick that fund and any others that you wish to convert to the specific share method. Then you have to wait until the next trading day for the change to go into affect before you can sell the specific shares.
Just as an example, my REIT fund is up over 15% YTD and as a consequence my REIT allocation is 10% out of balance which has triggered a rebalance. (This is a volatile asset class). But if I did the default sale, my older shares are up over 100% since purchase and which would cause a considerable realized gain. My newest shares are up a little over 15%, so would still only add about 1/4 of the amount of realized gain to my AGI compared to the older shares, a considerable savings.
As I need to trim from funds for rebalancing that have shares purchased from 2012 or later, I will be doing this conversion in order to minimize the realized gain and subsequent increase in my taxable income.
I thought others might want to be aware of this option when you are rebalancing your taxable accounts. I think it will be saving me a considerable amount of taxes in the future when I rebalance or sell funds for income.
The IRS changed reporting rules for assets bought in 2012 and later. Assets bought before 2012 - a brokerage does not report the basis on the 1099, but for assets purchased 2012 and later, the brokerage does report the basis.
Due to this, my mutual funds instead of being treated as all one lot with an average basis, are split into two lots - a pre-2012 lot with one average basis, and a 2012 or later lot with a different, and considerably higher, average basis. All my bond funds, and about half my equity mutual funds have this situation. Most of my mutual fund shares are pre-2012, but there are enough shares purchased afterwards to make a difference when rebalancing.
By default, Fidelity uses average cost basis for mutual funds. If you had started out configured to use specific share basis, this is a non issue. But many folks are probably like me and just used the defaults. I also used to automatically reinvest distributions as I was building my retirement fund, but I stopped that practice several years ago.
So - the average basis method ended up being broken and if I sell some shares without paying attention, by default it will come out of the older lot with the often considerably lower cost basis. This caught me by surprise one time last year when I was trying to do some tax loss harvesting. And I ended up selling more of the fund to get the larger realized loss on the newer shares with the higher basis. This really hadn't been an issue until recently because I didn't have that many shares purchased after 2012 except for bond funds which I normally haven't been trimming.
So now, if I need to rebalance by selling a mutual fund, I first check my pre-post 2012 lot situation, and if there are any shares purchased after 2012 with a higher basis, I convert that fund from Average Share Method to Specific Share Method. This assigns the (pre and post 2012) average basis to each lot bought before and after 2012, but now you can sell specific shares. Future shares purchase will take on their own basis. When the IRS changed the 2012 reporting requirements, they also did away with the requirement to get IRS permission to switch from average to specific cost share method, and Fidelity now allows you to make this change online.
It's a bit tricky to do online at Fidelity - you actually initial a mutual fund sale, choose specific shares, are told you have to convert which kicks you out of the trade and on to a screen that lets you pick that fund and any others that you wish to convert to the specific share method. Then you have to wait until the next trading day for the change to go into affect before you can sell the specific shares.
Just as an example, my REIT fund is up over 15% YTD and as a consequence my REIT allocation is 10% out of balance which has triggered a rebalance. (This is a volatile asset class). But if I did the default sale, my older shares are up over 100% since purchase and which would cause a considerable realized gain. My newest shares are up a little over 15%, so would still only add about 1/4 of the amount of realized gain to my AGI compared to the older shares, a considerable savings.
As I need to trim from funds for rebalancing that have shares purchased from 2012 or later, I will be doing this conversion in order to minimize the realized gain and subsequent increase in my taxable income.
I thought others might want to be aware of this option when you are rebalancing your taxable accounts. I think it will be saving me a considerable amount of taxes in the future when I rebalance or sell funds for income.
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