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INSTITUTIONS
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RETIREMENT PLAN INVESTOR
Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use:
IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1 OR 2
Visit americanfunds.com/retire
IF YOUR PLAN ID BEGINS WITH 34 OR 135
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DEFINED CONTRIBUTION FOCUS FUNDS
EMPLOYER-SPONSORED PLANS
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CLIENT ACCOUNT SUPPORT
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
No. Broadly speaking, the IRS regulations apply to taxable sales and exchanges, which exclude sales and exchanges in tax-favored accounts, such as retirement and 529 accounts. In addition, money market accounts that maintain a constant net asset value are not subject to the cost basis regulations.
The IRS website has many cost basis resources, including:
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.
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.
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 method |
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
Noncovered shares will be redeemed before covered shares unless your client selects the specific lot identification method and identifies covered shares to be redeemed.
Cost basis accounting methods
No. Each taxpayer’s situation is unique, so we encourage your client to consult his or her tax advisor or the IRS to determine which cost basis method to select.
The Specific Lot Identification method requires that your client identify to us the specific shares to sell or exchange for each sale or exchange. We recognize, however, that there may be situations where investors don’t specify the shares they want to use. In such instances, we ask investors to designate a secondary method we can use to make the sale or exchange. If an investor has not set up a secondary method, we’ll use First In, First Out as the default secondary method.
Selecting a cost basis method
For most accounts, we’ve traditionally used the Average Cost method for cost basis reporting, and we’ll continue to use that method for noncovered shares. If your client has been using a method other than Average Cost, he or she can continue to use that method for noncovered shares. If, however, your client has used Average Cost for reporting to the IRS in the past, it is our understanding that the IRS requires your client to continue using Average Cost for noncovered shares going forward unless permission is received from the IRS to use another cost basis method. Your client should consult a tax professional for questions about his or her individual situation.
Tax reporting
No. We do not report cost basis information for noncovered shares to the IRS.
Cost basis information for covered shares can be found on your client’s quarterly shareholder statements and on Form 1099-B.
If you or your client provided us with cost basis information for noncovered shares, we will report this information on your client's quarterly shareholder statements and on Form 1099-B. However, we cannot guarantee the accuracy of cost basis information provided by you or your client.
To view cost basis information or change the cost basis method, log in to your client's account and go to Profile & Settings.
Transfers, gifts and inheritances
The cost basis information for covered shares generally transfers. The cost basis information for noncovered shares, however, is not required to be transferred with shares.
Yes, assuming that we maintained a cost basis for the noncovered shares when originally acquired, and we receive cost basis information on the transferred noncovered shares.
The rules require us to track and report to the IRS cost basis for covered shares that are gifted or inherited. When noncovered shares are transferred, they remain noncovered. When covered shares are transferred, they remain covered if we receive the information required to calculate the cost basis.
Wash sales and sales load deferrals
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.
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 FundSM) 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
A return of capital is created when a fund pays more in dividend distributions to investors than it earned on a tax basis during the fund’s fiscal year. This amount will be reported in box 3 of Form 1099-DIV as a nondividend distribution. This amount is not taxable as income; however, it will reduce the investor’s cost basis. A return of capital that exceeds an investor’s cost basis must be reported as capital gains.
Corporations
As part of the regulations, the IRS has determined that S corporations are subject to 1099-B reporting on any sales or exchanges of covered shares. C corporations, however, are not subject to 1099-B reporting.
The IRS has a list of specific requirements that a corporation must meet before it can be considered an S corporation. Please see the S corporation article or Instructions for Form 2553 on the IRS website.
Although S corporations are not subject to 1099-DIV or 1099-INT reporting, any S corporation without a certified taxpayer identification number (TIN) could be subject to backup withholding on proceeds from sales or exchanges on covered shares.
Your client can submit a certified IRS Form W-9 with the new classification.
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.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
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American Funds Distributors, Inc., member FINRA.
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.