Need advice on cost basis calculation for mutual fund sale

[NameRedacted]

Any help on this would be much appreciated.

Every year for the last 6-7 years I've done my gf's brother's taxes. They are usually straightforward but this year he sold part of a mutual fund that he owns. He sold $1000 worth of shares or 61.996 to be exact.

He gave me the paper work over a month ago but there was no indication of the cost basis. I told him to contact his FA and get details of how much he paid for the stock. After much back and forth he finally got that. Here is the problem. He has apparently been investing $25 each month since 1985. I now have a print out showing the number of shares purchased each month plus the dividends and capital gains which were re-invested and on which dates. I know he's been paying taxes on the gains and dividends.

I've never owned mutual funds. I've always owned individual stocks and never re-invested dividends.

Since the paperwork doesn't indicate which 61.996 shares were sold I'm assuming that I can choose any arbitrary set of shares that are most favorable tax-wise as long as I keep track of which ones for future years? I can choose the ones he paid the most for to give him a small tax loss.

I'm thinking I don't need to worry about the capital gains and dividends since they've already been taxed. They won't increase/decrease the cost basis of the original shares? He didn't sell all his shares just a small portion.

On a different topic, looking at the print out - I'm surprised that there was no real growth in the share price over the last 30 years. So, for example, I see in 1986 he purchased some at 17.77 but the recent sale was at 16.13. Is this expected for mutual funds? No growth in 30 years? I think this is a fairly well known fund. It's Templeton World Fund.

 

[kaneohe]

.......................... After much back and forth he finally got that. Here is the problem. He has apparently been investing $25 each month since 1985. I now have a print out showing the number of shares purchased each month plus the dividends and capital gains which were re-invested and on which dates. I know he's been paying taxes on the gains and dividends.

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

Since the paperwork doesn't indicate which 61.996 shares were sold I'm assuming that I can choose any arbitrary set of shares that are most favorable tax-wise as long as I keep track of which ones for future years? I can choose the ones he paid the most for to give him a small tax loss.

I'm thinking I don't need to worry about the capital gains and dividends since they've already been taxed. They won't increase/decrease the cost basis of the original shares? He didn't sell all his shares just a small portion.

On a different topic, looking at the print out - I'm surprised that there was no real growth in the share price over the last 30 years. So, for example, I see in 1986 he purchased some at 17.77 but the recent sale was at 16.13. Is this expected for mutual funds? No growth in 30 years? I think this is a fairly well known fund. It's Templeton World Fund.

A few comments on the bolded phrases:
1) For mutual funds, you can specify the shares you sell but must do so at the time of sale and must be acknowledged in writing by the broker. Since that wasn't done, choices are average cost or FIFO (earliest purchases sold first).
2)Reinvestments of CG/DIV are purchases just like new buys so those distributions add to basis ........the reinvested shares have that basis.
3)NAV is only part of the story. The number of shares has increased also so you would have to compare current value to amount invested over time.

http://quotes.morningstar.com/chart/fund/chart?t=FTWRX&region=usa&culture=en-US

click on the "max" tab in the Zoom line (middle of page, right hand side). 10K grows to 687K in 38 yrs or so,
perhaps better than we could do.

 

[athena53]

An amateur opinion (I am definitely not a CPA) but I wouldn't go crazy fine-tuning your calculations. Do something reasonable, document the heck out of it and kiss it goodbye. What's the maximum gain/loss on a $1,000 sale- $400? And what's the tax on that? In the unlikely event the IRS audits and decides it should have been a different number, the change in tax liability won't be that much.

 

[kaneohe]

An amateur opinion (I am definitely not a CPA) but I wouldn't go crazy fine-tuning your calculations. Do something reasonable, document the heck out of it and kiss it goodbye. What's the maximum gain/loss on a $1,000 sale- $400? And what's the tax on that? In the unlikely event the IRS audits and decides it should have been a different number, the change in tax liability won't be that much.

You might want to run a quick dummy return. If in 15% bracket (including the 1K CG), the tax on CG will be 0 so using basis 0 could save you a lot of time.
.....so if it pertains, good advice from athena.

 

[LOL!]

This seems like a simple and trivial situation to me.

First, the rules are found in IRS Publication 550 which is easy to read.

Second, you apparently have all the transaction info for the life of this investment which is great.

Third, he sold the first 61.996 shares ever purchased back in 1985. That's not the first 40 $25 purchases because of the dividend reinvestment for more than 3 years.

Fourth, one can either chose Average Basis or actual basis (sometimes called Specific Identification) for the cost basis. No one can calculate Average Basis themselves, so if the financial institution didn't give that number, you should use the actual cost paid for the first 61.996 shares. I would just cross them out with a pencil as you sell them. That way, you only need one set of documents with the transactions as this investment gets sold.

Fifth, in the future, investor does NOT have to sell on FIFO if and only if he specifically identifies the shares to sale at the time of the sale. A so-called Letter of Instruction would be one way to do this, as in "Please sell the 45.144 shares purchased between 9/1/2015 and 12/26/2016 as soon as possible."

Sixth, now that shares have been sold, they cannot be sold again. So keep the list with the pencil markings to indicate which shares have been sold until all shares have been sold.

Easy.

 

[pb4uski]

To pile on... if he is in the 15% tax bracket don't spend a lot of time sweating it as the LTCG tax rate is 0%. I would just take the basis as the first 61.996 shares purchased (by cash or reinvested dividends or reinvested capital gain distributions), calculated the gain and see what it looks like. If the gain is reasonable, declare victory and move on.

 

[scrabbler1]

I have a spreadsheet for each mutual fund I own and it has a line for each transaction I made. To the right of all those columns I have more columns for when (if?) I sell any of the shares I bought. This comes in very handy for when I sell those shares because I can easily figure out my cost basis (using FIFO), followed by the gain or loss from selling each block of shares I purchased with either my own outside money or from dividend and cap gain reinvestments.


I can then group together all the individual sales of each block of shares I bought to figure out if I had a capital gain or loss on them. If the purchased shares took place less than a year earlier, then I will split up the whole sale into sort-term and long-term sales. That doesn't apply to you, NameRedacted, so that will simplify everything a lot.


Earlier this year, I sold $30k worth of shares from a stock fund. Using FIFO, I bought those shares over a 3-year period from 1998-2000 and they included 65 different purchases, most of them through dividend and cap gain reinvestments. But once I inserted the right formula, I just copied it down to the last row I had to include in order to satisfy the total number of shares sold to need the $30k. I have to tweak the first line and last line of this group of transactions because they involve only some of the total shares I bought on that date.


Once you set up a similar spreadsheet (or do it by hand), you will be able to calculate your cost basis and figure out if you have an overall long-term cap gain or loss on the sale. Make sure to include every block of shares bought, either through those $25 purchases or ones bought through dividend or cap gains reinvestment, as LOL and Kaneohe alluded to.

 

[gcgang]

For a $1000 sale, the answer is whatever you want. I'd use 5/14/89 for $997.

 

[RunningBum]

Fourth, one can either chose Average Basis or actual basis (sometimes called Specific Identification) for the cost basis. No one can calculate Average Basis themselves, so if the financial institution didn't give that number, you should use the actual cost paid for the first 61.996 shares. I would just cross them out with a pencil as you sell them. That way, you only need one set of documents with the transactions as this investment gets sold.

Why not? All you have to do is add up what you paid for the shares, including shares bought through dividend reinvestment, and divide by the number of shares. At this point you'd be locked into using average cost for the rest of the sales, and if more shares were bought the average on the remaining would be recalculated in the same way. It's a bit more work but not at all impossible.

I'm not saying using average basis is the best way (it usually isn't), but it is an option.

Personally, I'd do FIFO in this case since he didn't specifically identify the shares at the time of sale.

 

[kaneohe]

Why not? All you have to do is add up what you paid for the shares, including shares bought through dividend reinvestment, and divide by the number of shares. At this point you'd be locked into using average cost for the rest of the sales, and if more shares were bought the average on the remaining would be recalculated in the same way. It's a bit more work but not at all impossible.

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

It's certainly possible but I'm not sure most, including me, would know how to do it.
Ex: Using AVB for all sales
1) Buy 100sh@$2/sh
2)Buy 300sh@3/sh
3)Buy200sh@ 1/sh
4) Sell 100@ 4/sh
5)Buy 100@ 3/sh
What is AVB now? (pls show steps)

 

[RunningBum]

It's certainly possible but I'm not sure most, including me, would know how to do it.
Ex: Using AVB for all sales
1) Buy 100sh@$2/sh
2)Buy 300sh@3/sh
3)Buy200sh@ 1/sh
4) Sell 100@ 4/sh
5)Buy 100@ 3/sh
What is AVB now? (pls show steps)

In steps 1-3 you bought 600 shares for a total of $1300 ($200+900+200). $2.16666/share

Step 4 sold 100 shares. The basis for the sale is the average, $217, rounded to nearest dollar as I think IRS allows.
You still have 500 shares with basis of $1083 ($1300-217), $2.166/share.

Step 5 added 100 shares and $300, so you have 600 shares with basis of $1383. $2.305/share.

 

[kaneohe]

Thanks, RB................... A+

 

[LOL!]

Why not? All you have to do is add up what you paid for the shares, including shares bought through dividend reinvestment, and divide by the number of shares. At this point you'd be locked into using average cost for the rest of the sales, and if more shares were bought the average on the remaining would be recalculated in the same way. It's a bit more work but not at all impossible.

I'm not saying using average basis is the best way (it usually isn't), but it is an option.

Personally, I'd do FIFO in this case since he didn't specifically identify the shares at the time of sale.

OK, I take it back that "No one can calculate ....", but clearly it is more complicated if one has sold and bought shares from time to time along the way.

While Specific ID (and its default selection of identifying shares FIFO) is pretty simple: Just look at one's list of purchases and use that number. It never changes as long as there are no splits.

One more thing: One can use "Various" or "Var-L" for the "Date acquired." on the tax form in the specific case discussed in this thread.

 

[RunningBum]

I agree it's more complicated to do average with multiple transactions if you have to figure it out for yourself, and one would almost always be better off selecting shares to manage capital gains.

 

[COcheesehead]

And this is why you use tax software like TurboTax and download the 1099's. All of this could have been handled with a couple clicks.

 

[scrabbler1]

I have been using "Various" for "Date Acquired" for many years. On my friend's 2015 tax return, I once wrote "various 2015" for the date SOLD because he had a monthly automatic redemption program for one mutual fund and the shares he sold were all bought on a single date. Sure beat listing them all out. As long as numbers all balanced out that's all the IRS cared about, I suppose.

 

[ERD50]

Like others have said, I would not sweat this too much, any reasonable numbers will give similar results in tax due, and maybe moot if all are zero.

If he's paying an FA, the FA sure should be providing him with the cost basis - what's he paying for if he isn't getting any service?

Did he ever sell any shares? If not, add up all the purchase amounts (you don't need to worry about the purchase price), divide by the number of shares owned, and you have your $/sh cost basis.

Stop reinvesting dividends - it really complicates things! Take them (you pay tax either way), and reinvest in one lump if you want.

As far as no growth - maybe the growth has all been in dividends? So he has more shares. The NAV may have been stable?

-ERD50

 

[ERD50]

And this is why you use tax software like TurboTax and download the 1099's. All of this could have been handled with a couple clicks.

Not if the 1099's do not report the cost basis. And since this goes back to 1986, probably not.

Though you could first assume zero, and see if it increases taxes. If not, done and done!


-ERD50

 

[COcheesehead]

Not if the 1099's do not report the cost basis. And since this goes back to 1986, probably not.

Though you could first assume zero, and see if it increases taxes. If not, done and done!


-ERD50

When you download from the brokerage you should get it all. I do from Fido.

 

[ERD50]

When you download from the brokerage you should get it all. I do from Fido.

I doubt they have that for purchases going back to 1986. And even if Fido does, that doesn't meant this guy's brokerage does.

If they did, I would assume he would have already have seen the cost basis on the paper 1099-B. I've had it on recent transactions, but not the older ones.

-ERD50

 

[COcheesehead]

I doubt they have that for purchases going back to 1986. And even if Fido does, that doesn't meant this guy's brokerage does.

If they did, I would assume he would have already have seen the cost basis on the paper 1099-B. I've had it on recent transactions, but not the older ones.

-ERD50

Point taken. I will continue my digital record keeping. Seems easier.

 

[ERD50]

Point taken. I will continue my digital record keeping. Seems easier.

Going the digital route is great, but if they don't have the data available, it doesn't help.

 

[COcheesehead]

Going the digital route is great, but if they don't have the data available, it doesn't help.

I get what you're saying. What I am saying is I will continue to keep my yearly statements digital and avoid situations like this for me.

 

[Rustward]

Before I made my first investment in 1985, my CFP (FA) spent about an hour educating me on the importance of tracking cost basis by keeping every trade confirmation as well as statements. Now the brokerages keep that information, but they were not required to in 1985. Now it is all in Quicken, so I have that data instantly available.

So see? Not all financial professionals are worthless.

 

[NameRedacted]

Thanks for the responses everyone. I went with FIFO and the gain was $115. It only really affected State taxes.

I also decided to investigate what kind of return he got. The value of the fund is about $48,000 he invested $25/month over about 32 years with dividends reinvested. According to the calculator at Bankrate that's about 8.7%.

I compared that with the average return for the last 32 years dividends re-invested for the S&P and that came out at 10.72%.

That doesn't appear to be anywhere near as bad as I first imagined.