Cost Basis Reporting and FAQ

Tax Center

Cost Basis Reporting and FAQ

Cost Basis Reporting

The Internal Revenue Service requires mutual fund companies to report cost basis information to both investors and the IRS on the sale or exchange of fund shares acquired on or after January 1, 2012 — called “covered” shares.

The IRS regulations only apply to taxable accounts. As a result, tax-favored accounts, including 529 and retirement accounts, are not required to report cost basis.

What “Cost Basis“ Means

The cost basis of mutual fund shares is typically the purchase price, including any sales charges paid when an investor purchased shares. Activity including reinvested dividends/capital gains and wash sale adjustments may increase the basis while other activity including nondividend distributions (i.e., return of capital) may reduce the basis.

Covered Versus Noncovered Shares

The regulations make the distinction between covered and noncovered shares in a taxable account.

Covered shares are shares acquired on or after January 1, 2012. We are required to report the cost basis for any sales or exchanges of covered shares to the investor and the IRS.
Noncovered shares are shares acquired before January 1, 2012, and any shares for which cost basis is unknown. We are not required to report cost basis for these shares to the IRS.

Capital Gain or Loss

When shares are sold or exchanged, the capital gain or loss is the difference between the proceeds from the sale or exchange and the cost basis of the shares.

Even though we will report cost basis for the sale or exchange of covered shares to the IRS, the investor will be responsible for reporting any capital gain or loss information for both covered and noncovered shares to the IRS.

Holding Period

Whether shares are purchased directly or through reinvestment, the length of time an investor owned the shares — their holding period — determines whether their gain or loss is considered long- or short-term.

Long-term: shares held for more than one year
Short-term: shares held for one year or less

Special rules apply to losses from the sale of shares held six months or less if the investor received capital gain distributions on those shares. Please consult a tax professional for more information.

Frequently Asked Questions

Overview

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Cost Basis

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Are reinvested dividends and capital gains considered purchases for cost basis?

Yes. Reinvested dividends and capital gains are considered additional purchases made at the net asset value share price on the day the reinvestment occurred.

Why would American Funds not provide average cost basis on some accounts with noncovered shares?

We generally cannot determine the average cost basis for accounts opened on or before December 31, 1983, and for accounts with noncovered shares acquired by transfer. If your client selects the specific lot identification method for covered shares, we will not be able to provide average cost information for the noncovered shares.

Which methods does American Funds provide?

We provide several IRS-approved methods for determining your client's cost basis on covered shares — each with different tax implications.

Your clients should consult with a tax professional to determine which method should be considered for their individual tax situation.

Default method

Description

Average Cost

Determined by dividing the total cost of the shares owned at the time of the sale/exchange by the total number of shares owned to produce an average cost per share. Shares acquired first are sold first to determine your client's holding period.

This cost basis method is our default for covered shares.

Note: Average cost is calculated separately for covered and noncovered shares.

Other methods

Description

First In, First Out (FIFO)

Last In, First Out (LIFO)

High Cost, First Out (HIFO)

Low Cost, First Out (LOFO)

Loss Gain Utilization

Specific Lot Identification

Shares acquired first are sold first.

Shares acquired last are sold first.

Shares with the highest purchase price are sold first.

Shares with the lowest purchase price are sold first.

Shares are sold by taking losses first (short-term, then long-term) and gains last (long-term, then short-term).

Your clients must identify the specific shares they want to sell or exchange at the time of each sale or exchange. The original purchase dates and prices of the shares your client chooses will determine their cost basis and holding period.

Note: If your client selects Specific Lot Identification, American Funds will no longer be able to provide Average Cost information for their noncovered shares. Therefore, if your client currently does not maintain records adequate to determine basis information for all of their noncovered shares, please have your client consider this limitation before selecting Specific Lot Identification.

Covered and Noncovered Shares

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Cost Basis Accounting Methods

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Selecting a Cost Basis Method

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Tax Reporting

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Transfers, Gifts and Inheritances

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Wash Sales and Sales Load Deferrals

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What is a wash sale, and how is it affected by the regulations?

In general, a wash sale occurs if your client sells or exchanges fund shares at a loss and, during the 61-day period beginning 30 days before the sale or exchange, your client purchases the same fund shares, regardless of the account. The loss is not allowed for tax purposes and must be added to the cost basis of the repurchased shares. The regulations require us to track wash sales separately for covered and noncovered shares, and within the same fund and share class. As was the rule prior to the regulations, investors must apply the wash sales rules across all of their accounts in the same fund.

What is a load deferral, and why is it important to cost basis?

If your client redeems shares within 90 days of purchase and then purchases shares in the same fund or of another one of the American Funds (except American Funds U.S. Government Money Market Fund℠) within 90 days, such later purchase may be made without a sales charge if your client notifies us that he or she is using the right of reinvestment. Any sales charge on the shares initially purchased may not be included in the basis of the shares redeemed if the subsequent purchase occurs before February 1 of the following year. Such sales charge must be added to the basis of the newly acquired shares.

The regulations require us to apply the load deferral rules only within the same fund and share class. As was the rule prior to the regulations, your client must apply the load deferral rules across all American Funds.

Example: Assume an investor purchases The Growth Fund of America® on March 5, 2012, with a sales charge, and sells The Growth Fund of America on April 12, 2012. Further assume that the investor uses the right of reinvestment to acquire shares in The Income Fund of America® on July 6, 2012, without a sales charge. Although we’re not required to apply the load deferral rules because the later purchase was in a different fund, the investor is required to apply the load deferral rules. The sales charge paid for The Growth Fund of America shares may not be included in the basis of The Growth Fund of America shares sold on April 12, 2012. Instead, the sales charge is added to the basis of The Income Fund of America shares acquired on July 6, 2012.

Return of Capital

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Corporations

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Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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Cost Basis Reporting and FAQ

Cost Basis Reporting

What “Cost Basis“ Means

Covered Versus Noncovered Shares

Capital Gain or Loss

Holding Period

Frequently Asked Questions

Overview

Is cost basis information required for all account types?

Where can my client get more information regarding cost basis?

Cost Basis

Are reinvested dividends and capital gains considered purchases for cost basis?

Why would American Funds not provide average cost basis on some accounts with noncovered shares?

Which methods does American Funds provide?

Default method

Description

Other methods

Description

Covered and Noncovered Shares

For accounts with both covered and noncovered shares, which shares will be redeemed first?

Cost Basis Accounting Methods

Can you guarantee that the Loss Gain Utilization method will reduce my client’s taxes?

My client selected Specific Lot Identification as their accounting method. Why is it necessary to select a secondary method?

Selecting a Cost Basis Method

Is it possible for American Funds to provide a cost basis method other than Average Cost for noncovered shares?

Tax Reporting

Does American Funds report cost basis information to the IRS on noncovered shares?

When and how will cost basis information be reported to my client?

Transfers, Gifts and Inheritances

If my client transfers shares into an American Funds account, will the cost basis also transfer?

If my client receives a transfer of noncovered shares, will those shares be included in the average cost calculations of the noncovered shares if my client makes a sale or exchange?

How do cost basis regulations affect gifted or inherited shares?

Wash Sales and Sales Load Deferrals

What is a wash sale, and how is it affected by the regulations?

What is a load deferral, and why is it important to cost basis?

Return of Capital

What is a return of capital and how does it impact cost basis?

Corporations

Why does American Funds need to know the tax classification for a corporate account?

What is the difference between a C corporation and an S corporation?

How do the regulations impact S corporations?

How do I notify American Funds of corporate tax classification changes?