Do you have any taxable mutual fund investments? If you do, you can expect to receive expanded year-end tax information from your broker or fund company when you sell or redeem your shares.

Cost Basis Information

Under IRS requirements, the Form 1099-B (Proceeds From Broker and Barter Exchange Transactions) you receive from your broker or fund company for tax years you sell or redeem fund shares will report your basis in those shares. The form will also specify whether any capital gain or loss realized on the sale or redemption of fund shares is short term or long term. Basis reporting is mandatory for fund shares acquired after 2011. The IRS also receives a copy of this form.

Why It Matters

When you buy fund shares at different times and prices, your basis in the shares (generally, your cost) can vary, sometimes significantly. If you later sell or redeem only some of your fund shares, you’ll need to know your basis in those particular shares to determine any capital gain or loss on the transaction. The higher your basis, the lower your capital gain (or the greater your capital loss) on a sale or redemption transaction.

Unless you specify otherwise, a default method — generally, average cost — will be used to calculate your basis. Your account may have two separate average costs: one for shares acquired before 2012 and one for shares acquired in 2012 and later years. (A broker or fund may elect to compute an average cost for all shares held in a single account under certain circumstances.)

You don’t have to use your broker’s or fund company’s default method. You may elect another permitted cost basis method, but you must notify the broker or fund of your election in a timely manner. Specific identification (you identify the shares or the lots you are selling) and first-in, first-out or FIFO (the shares purchased first are sold first) are examples of other permissible methods. Check with your mutual fund company, broker, or qualified tax professional if you have questions about when and how to make a cost basis election.


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