Cost Basis Reporting: Understanding the Basics
The Emergency Economic Stabilization Act, HR1424, was signed into law on October 3, 2008 and included provisions from the Energy Improvement and Extension Act of 2008. One provision requires mutual fund companies to provide cost basis information to shareholders and to the Internal Revenue Service (IRS) when mutual fund shares acquired on or after January 1, 2012 are redeemed.
When you sell or exchange shares of a mutual fund or other securities, you may have a capital gain or loss that must be reported to the IRS. To calculate the gains or losses from shares sold, you must know the cost of the different shares you own. Cost basis is the original price paid for those shares (including fees or charges, if any, paid at the time of purchase). Any transaction that increases or decreases the number of shares in an account can affect cost basis.
There are several available cost basis calculation methods for the purpose of determining gains and losses. The methods are as follows:
- Average Cost: an average of the cost of the shares held in the account at the time of redemption. SunAmerica's default method.
- First In, First Out (FIFO): shares of the mutual fund are sold in the order in which they were acquired.
- Specific Share Identification: the investor indicates the purchase lot(s)—or the actual shares by quantity and date purchased—that he or she would like to redeem.
SunAmerica Mutual Funds has solicited shareholders affected by the new legislation to select a cost basis method. Once a method is selected, it will be used for all future share purchases within that account. Changes or revocations from your selected reporting method must be communicated to us in writing and will only be effective for shares acquired after the change is made. If no selection is made, SunAmerica Mutual Funds’ default method of Average Cost will apply.
Covered vs. Non-Covered Shares
The new cost basis regulations treat mutual fund shares acquired before the effective date (January 1, 2012) as non-covered shares. Mutual funds are not required to report cost basis to the IRS for shares purchased prior to the effective date.
Shares acquired on or after the effective date (January 1, 2012) are considered covered shares. Mutual funds will now report the cost basis for all covered shares to both you and the IRS. When filing your tax return, you will be required to use the cost basis reported on your IRS Form 1099-B for covered shares. The cost basis method that will be used for all non-covered shares is Average Cost.
Within this new regulation, mutual fund companies will be required to begin tax reporting and provide cost basis information to the IRS on all redemptions of mutual fund shares acquired on or after January 1, 2012 by S Corporations (corporations that meet the IRS requirements to be taxed under Subchapter S).
- Average Cost: A method of calculating the adjusted cost basis in which the investor uses an average of the cost of the shares held in the account at the time of redemption.
- Capital Gain: The difference between the purchase price and sale price of an asset, where the sale price is higher than the purchase price.
- Capital Loss: The difference between the purchase price and sale price of an asset, where the sale price is lower than the purchase price.
- Cost Basis: The price you paid for your shares, adjusted for certain corporate actions, and any sales charges or transaction fees.
- Covered Shares: Shares purchased after the effective date. They are considered covered by the new regulations.
- First In, First Out (FIFO): A method of calculating cost basis in which the shares of the mutual fund are sold in the order in which they were acquired.
- Non-Covered Shares: Shares purchased before the effective date. They are not covered by the new regulations.
- Specific Share Identification: A method of calculating cost basis in which the investor indicates the purchase lot(s)—or the actual shares by quantity and date purchased—that he or she would like to redeem.
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