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.
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.