Publication 564 |
2000 Tax Year |
Sales, Exchanges, & Redemptions
When you sell or exchange your mutual fund shares, or if they are
redeemed (a redemption), you will generally have a taxable gain or a
deductible loss. This also applies to shares of a tax-exempt mutual
fund. Sales, exchanges, and redemptions are all treated as sales of
capital assets. The amount of the gain or loss is the difference
between your adjusted basis (defined earlier) in the shares and the
amount you realize from the sale, exchange, or redemption. This is
explained further under Gains and Losses, later.
Sale.
In general, a sale is a transfer of shares for money only.
Exchange.
An exchange is a transfer of shares in return for other shares.
Redemption.
A redemption occurs when a fund reacquires its shares from you in
exchange for money or other property.
When there is a sale, exchange, or
redemption of your shares in a fund, keep the confirmation statement
you receive. The statement shows the price you received for the shares
and other information you need to report gain or loss on your return.
Exchange of shares in one mutual fund for shares in another
mutual fund.
Any exchange of shares in one fund for shares in another fund is a
taxable exchange. This is true even if you exchange shares in one fund
for shares in another fund within the same family of funds. Report any
gain or loss on the shares you gave up as a capital gain or loss in
the year in which the exchange occurs. Usually, you can add any
service charge or fee paid in connection with an exchange to the cost
of the shares acquired. For an exception, see Commissions and
load charges under Keeping Track of Your Basis,
earlier.
Information returns.
Mutual funds and brokers must
report proceeds from sales, exchanges, or redemptions to the Internal
Revenue Service. They must give each customer a written statement with
that information by January 31 of the year following the calendar year
the transaction occurred. Form 1099-B, or a substitute, may be
used for this purpose.
Report your sales shown on Form(s) 1099-B (or substitute) on
Schedule D (Form 1040) along with your other gains and losses. If the
total of the sales price amounts reported on Form(s) 1099-B in
box 2 is more than the total you report on lines 3 and 10
of Schedule D, attach a statement to your return explaining the
difference.
Taxpayer identification number.
You must give the broker your correct taxpayer identification
number (TIN). Generally, an individual will use his or her social
security number as the TIN. If you do not provide your TIN, your
broker is required to withhold tax at a rate of 31% on the gross
proceeds of a transaction, and you may be penalized.
Identifying the Shares Sold
To figure your gain or loss when you dispose of mutual fund shares,
you need to determine which shares were sold and the basis of those
shares. If your shares in a mutual fund were acquired all on the same
day and for the same price, figuring their basis is not difficult.
However, shares are generally acquired at various times, in various
quantities, and at various prices. Therefore, figuring your basis can
be more difficult. You can choose to use either a cost basis or an
average basis to figure your gain or loss.
Cost Basis
You can figure your gain or loss using a cost basis only if you did
not previously use an average basis for a sale, exchange, or
redemption of other shares in the same mutual fund.
To figure cost basis, you can choose one of the following methods.
- Specific share identification.
- First-in first-out (FIFO).
Specific share identification.
If you adequately identify the shares you sold, you can use the
adjusted basis of those particular shares to figure your gain or loss.
You will adequately identify your mutual fund shares, even if you
bought the shares in different lots at various prices and times, if
you:
- Specify to your broker or other agent the particular shares
to be sold or transferred at the time of the sale or transfer,
and
- Receive confirmation of your specification from your broker
in writing within a reasonable time.
The confirmation by the mutual fund must confirm that you
instructed your broker to sell particular shares. You continue to have
the burden of proving your basis in the specified shares at the time
of sale or transfer.
First-in first-out (FIFO).
If your shares were acquired at different times or at different
prices and you cannot identify which shares you sold, use the basis of
the shares you acquired first as the basis of the shares sold. In
other words, the oldest shares you own are considered sold first. You
should keep a separate record of each purchase and any dispositions of
the shares until all shares purchased at the same time have
been disposed of completely.
Table 3 illustrates the use of the FIFO method to figure
the cost basis of shares sold, compared with the use of the
single-category method to figure average basis (discussed next).
Average Basis
You can figure your gain or loss using an average basis only if you
acquired the shares at various times and prices, and you left the
shares on deposit in an account handled by a custodian or agent who
acquires or redeems those shares.
To figure average basis, you can use one of the following methods.
- Single-category method.
- Double-category method.
Once you elect to use an average basis, you must continue to use it
for all accounts in the same fund. (You must also continue to use the
same method.) However, you may use the cost basis (or a different
method of figuring the average basis) for shares in other funds, even
those within the same family of funds.
Example.
You own two accounts that hold shares of the income fund issued by
Company A. You also own 100 shares of the growth fund issued by
Company A. If you elect to use average basis for the first account of
the income fund, you must use average basis for the second account.
However, you may use cost basis for the growth fund.
You may be able to find the average basis of your shares from
information provided by the fund.
How to figure basis
Single-category method.
Under the single-category method, you find the average cost of
all shares owned at the time of each disposition,
regardless of how long you owned them. Include shares acquired with
reinvested dividends or capital gain distributions.
Table 3 illustrates the use of the single-category
method to figure the average basis of shares sold, compared with the
use of the FIFO method to figure cost basis (discussed earlier).
Even though you include all unsold shares of a fund in a single
category to compute average basis, you may have both short-term and
long-term gains or losses when you sell these shares. To determine
your holding period, the shares disposed of are considered to be those
acquired first.
Example.
You bought 400 shares in the LJO Mutual Fund: 200 shares on May 15,
1999, and 200 shares on May 15, 2000. On November 11, 2000, you sold
300 shares. The basis of all the shares sold is the same, but the
holding period of 200 shares is long-term and the holding period of
100 shares is short-term.
How to figure the basis of shares sold. Follow these 4
steps.
- Total the cost of all shares of the fund owned. (For other
than the first sale, add the cost or other basis of shares acquired
since the last sale to the remaining basis of the shares you owned
after that sale.)
- Total all shares owned. (For other than the first sale, add
the number of shares acquired since the last sale to the remaining
shares you owned after that sale.)
- Divide the result of (1) by the result of (2). This is your
average basis per share.
- Multiply the result of (3) by the number of shares sold.
This is the basis of shares sold.
Example 1.
You bought the following shares in the LJP Mutual Fund: 100 shares
in 1997 at $10 per share; 100 shares in 1998 at $12 per share; and 100
shares in 1999 at $26 per share. On May 16, 2000, you sold 150 shares.
The basis of shares sold is $2,400 ($16 per share), computed as
follows.
1) Total cost |
| ($1,000 + $1,200 + $2,600) |
$4,800 |
2) Total shares |
| (100 + 100 + 100) |
300 |
3) Average basis per share |
| ($4,800 x 300) |
$ 16 |
4) Basis of shares sold |
| ($16 x 150) |
$2,400 |
Remaining shares.
The average basis of the shares you still hold after a sale of some
of your shares is the same as the average basis of the shares sold.
The next time you make a sale, your average basis will still be the
same, unless you have acquired additional shares (or have made a
subsequent adjustment to basis).
Example 2.
Using the same facts as in Example 1, assume you sold an
additional 50 shares on December 15, 2000. You would not recompute the
average basis of the 150 shares you owned at that time because no
shares were acquired or sold since the last sale; rather, your basis
is the $16 per share computed earlier.
Example 3.
Using the same facts as in Example 1, assume you bought
an additional 150 shares at $14 a share on September 19, 2000, and
then sold 50 shares on December 15, 2000. The basis of the shares sold
is $750 ($15 a share), computed as follows.
1) Basis of remaining shares |
| ($16 x 150) |
$2,400 |
2) Cost of shares acquired 9/19/00 |
| ($14 x 150) |
$2,100 |
3) Cost of all shares owned |
| ($2,400 + $2,100) |
$4,500 |
4) Total shares owned |
| (150 + 150) |
300 |
5) Average basis per share |
| ($4,500 x 300) |
$ 15 |
6) Basis of shares sold |
| ($15 x 50) |
$ 750 |
Double-category method.
In the double-category method, all shares in an account at the time
of each disposition are divided into two categories: short-term and
long-term. Shares held one year or less are short-term. Shares held
longer than one year are long-term.
The basis of each share in a category is the average basis for that
category. This is the total remaining basis of all shares in that
category at the time of disposition divided by the total shares in the
category at that time. To use this method, you specify, to the
custodian or agent handling your account, from which category the
shares are to be sold or transferred. The custodian or agent must
confirm in writing your specification. If you do not
specify or receive confirmation, you must first charge the shares sold
against the long-term category and then charge any remaining shares
sold against the short-term category.
Changing categories.
After you have held a mutual fund share for more than one year, you
must transfer that share from the short-term category to the long-term
category. The basis of a transferred share is its actual cost or other
basis to you unless some of the shares in the short-term category have
been disposed of. In that case, the basis of a transferred share is
the average basis of the undisposed shares at the time of the most
recent disposition from this category.
Making the choice.
You choose to use the average basis of mutual fund shares by
clearly showing on your income tax return, for each year the choice
applies, that you used an average basis in reporting gain or loss from
the sale or transfer of the shares. You must specify whether you used
the single-category method or the double-category method in
determining average basis. This choice is effective until you get
permission from the IRS to revoke it.
Shares received as gift.
If your account includes shares that you received by gift, and the
fair market value of the shares at the time of the gift was not more
than the donor's basis, special rules apply. You cannot choose to use
the average basis for the account unless you submit a statement with
your initial choice. It must state that the basis used in figuring the
average basis of the gift shares will be the FMV at the time of the
gift. This statement applies to gift shares received before and after
making the choice, as long as the choice to use the average basis is
in effect.
Gains and Losses
You figure gain or loss on the disposition of your shares by
comparing the amount you realize with the adjusted
basis of your shares. If the amount you realize is more than the
adjusted basis of the shares, you have a gain. If the amount you
realize is less than the adjusted basis of the shares, you have a
loss.
Amount you realize.
The amount you realize from a disposition of your shares is the
money and value of any property you receive for the shares disposed
of, minus your expenses of sale (such as redemption fees, sales
commissions, sales charges, or exit fees).
Adjusted basis.
Adjusted basis is explained under Keeping Track of Your
Basis, earlier.
Maximum Capital Gains Rate
Wash sales.
If you sell mutual fund shares at a loss and within 30 days
before or after the sale you buy, acquire in a taxable exchange,
or acquire a contract or option to buy substantially identical
shares, you have a wash sale. You cannot deduct losses from wash
sales.
Substantially identical.
In determining whether the shares are substantially identical, you
must consider all the facts and circumstances. Ordinarily, shares
issued by one mutual fund are not considered to be substantially
identical to shares issued by another mutual fund.
For more information on wash sales, get Publication 550.
Reporting information from Form 1099-B.
Mutual funds and brokers report dispositions of mutual fund shares
on Form 1099-B, or a substitute form containing substantially
the same language. The form shows the amount of the sales price and
indicates whether the amount reported is the gross amount or the net
amount (gross amount minus commissions).
If your Form 1099-B or similar statement from the payer shows
the gross sales price, do not subtract the expenses of sale from it
when reporting your sales price in column (d) on Schedule D. Instead,
report the gross amount in column (d) and increase your cost or other
basis, column (e), by any expense of the sale. If your Form
1099-B shows that the gross sales price less commissions was
reported to IRS, enter the net amount in column (d) of Schedule D and
do not increase your basis in column (e) by the sales
commission.
Example 1.
You sold 100 shares of Fund HIJ for $2,500. You paid a $75
commission to the broker for handling the sale. Your Form 1099-B
shows that the net sales proceeds, $2,425 ($2,500 - $75), were
reported to the IRS. Report $2,425 in column (d) of Schedule D.
Example 2.
You sold 200 shares of Fund KLM for $10,000. You paid a $100
commission at the time of the sale. You bought the shares for $5,000.
The broker reported the gross proceeds to IRS on Form 1099-B, so
you enter $10,000 in column (d) of Schedule D and increase your basis
in column (e) to $5,100.
Note.
Whether you use Schedule D's line 1 (for a short-term gain or loss)
or line 8 (for a long-term gain or loss) depends on how long you held
the shares, discussed next.
Holding Period
When you dispose of your mutual fund shares, you must determine
your holding period. Your holding period determines whether the gain
or loss is a short-term capital gain or loss or a long-term capital
gain or loss.
Short-term gain or loss.
If you hold the shares for one year or less, your gain or loss
will be a short-term gain or loss.
Long-term gain or loss.
If you hold the shares for more than one year, your gain or loss
will be a long-term gain or loss.
Determining period held.
Determine your holding period by using the trade dates of your
purchases and your sales. The trade date is the date on
which you contract to buy or sell shares. Most mutual funds will show
the trade dates on confirmation statements showing your purchases and
sales.
Do not confuse the trade date with the settlement date,
which is the date by which the mutual fund shares must be delivered
and payment must be made.
To find out how long you have held your shares, begin counting on
the day after the trade date on which you bought the shares. (Do not
count the trade date itself.) The trade date on which you dispose of
the shares is counted as part of your holding period.
Example.
If you bought shares on January 11, 2000 (trade date), and sold
them on January 11, 2001 (trade date), your holding period would not
be more than one year. If you sold them on January 12, 2001, your
holding period would be more than one year (12 months plus 1 day).
Mutual fund shares received as a gift.
If you receive a gift of mutual fund shares and your basis is
determined by the donor's basis, your holding period is considered to
have started on the same day that the donor's holding period started.
Inherited mutual fund shares.
If you inherit mutual fund shares, you are considered to have held
the shares for more than one year, regardless of how long you actually
held them. Report the sale of inherited mutual fund shares on line 8
of Schedule D and enter "INHERITED" in column (b)
instead of the date you acquired the shares.
Reinvested distributions.
If your dividends and capital gain distributions are reinvested in
new shares, the holding period of each new share begins the day after
that share was purchased. Therefore, if you sell both the new shares
and the original shares, you might have both short-term and long-term
gains and losses.
Certain short-term losses.
Special rules may apply if you have a short-term loss on the sale
of shares on which you received an exempt-interest dividend or a
capital gain distribution.
Exempt-interest dividends before short-term loss.
If you received exempt-interest dividends on mutual fund shares
that you held for 6 months or less and sold at a loss, you may claim
only the part of the loss that is more than the exempt-interest
dividends. On Schedule D, column (d), increase the sales price by the
amount of exempt-interest dividends. Report the loss as a short-term
capital loss.
Example.
On January 8, 2000, you bought a mutual fund share for $40. On
February 3, 2000, the mutual fund paid a $5 dividend from tax-exempt
interest, which is not taxable to you. On February 12, 2000, you sold
the share for $34. If it were not for the tax-exempt dividend, your
loss would be $6 ($40 - $34). However, you must increase the
sales price from $34 to $39 (to account for the $5 portion of the loss
that is not deductible). You can deduct only $1 as a short-term
capital loss.
Capital gain distribution before short-term loss.
Generally, if you received capital gain distributions (or had to
report undistributed capital gains) on mutual fund shares that you
held for 6 months or less and sold at a loss, report only the part of
the loss that is more than the capital gain distribution (or
undistributed capital gain) as a short-term capital loss. The rest of
the loss is reported as a long-term capital loss.
Example.
On April 7, 2000, you bought a mutual fund share for $20. On June
25, 2000, the mutual fund paid a capital gain distribution of $2 a
share, which is taxed as a long-term capital gain. On July 13, 2000,
you sold the share for $17.50. If it were not for the capital gain
distribution, your loss would be a short-term loss of $2.50. However,
the part of the loss that is not more than the capital gain
distribution ($2) must be reported as a long-term capital loss. The
remaining $0.50 of the loss can be reported as a short-term capital
loss.
How To Figure
Net Gain or Loss
Separate your short-term gains and losses from your long-term gains
and losses on all the mutual fund shares and other capital assets you
disposed of during the year. Then determine your net short-term gain
or loss and your net long-term gain or loss.
Net short-term capital gain or loss.
Net short-term capital gain or loss is determined by adding the
gains and losses from lines 1 through 6 in column (f) of Part I,
Schedule D (Form 1040), Capital Gains and Losses. Line 7 is
the net short-term capital gain or loss.
Net long-term capital gain or loss.
Net long-term capital gain or loss is determined by adding the
gains and losses from lines 8 through 14 in column (f) of Part II,
Schedule D (Form 1040). Line 16 is the net long-term capital gain or
loss.
In figuring the net long-term capital gain or loss, you should
include any undistributed capital gain you reported on line 11 of
Schedule D and any capital gain distributions you reported on line 13
of Schedule D.
Total net gain or loss.
The total net gain or loss is determined by combining the net
short-term capital gain or loss on line 7 with the net long-term
capital gain or loss on line 16. Enter the result on line 17 of Part
III, Schedule D (Form 1040). If line 17 shows a gain, enter the amount
on line 13 of Form 1040. If line 17 shows a loss, see Limit on
Capital Loss Deduction, later.
Figuring Your Tax
If you are reporting capital gain distributions on Form 1040A, use
the Capital Gain Tax Worksheet in the Form 1040A
instructions to figure your tax. See How To Report,
earlier, to see whether you can report your capital gain
distributions on Form 1040A.
If you are reporting capital gain distributions on Form 1040, but
are not required to file Schedule D, use the Capital Gain Tax
Worksheet in the Form 1040 instructions to figure your tax. See
How To Report, earlier, to see whether you must file
Schedule D.
If you are required to file Schedule D, you will need to use Part
IV of Schedule D (Form 1040) to figure your tax if both of the
following are true.
- You have a net capital gain. You have a net capital gain if
both lines 16 and 17 of Schedule D are gains. (Line 16 is your net
long-term capital gain or loss. Line 17 is your net long-term capital
gain or loss combined with any net short-term capital gain or
loss.)
- Your taxable income on Form 1040, line 39, is more than
zero.
The tax rate on the part of your income that is net capital gain
may be 10%, 15%, 20%, 25%, or 28%, or a combination of those rates, as
shown in Table 4.
Limit on Capital Loss Deduction
If line 17 of Part III, Schedule D (Form 1040) shows a loss, your
allowable capital loss deduction is the smaller of:
- $3,000 ($1,500 if you are married and filing a separate
return), or
- Your total net loss shown on line 17 of Schedule D.
Enter your allowable loss on line 13 of Form 1040.
Example.
Bob and Gloria sold all of their shares in a mutual fund. The sale
resulted in a capital loss of $7,000. They had no other sales of
capital assets during the year. On their joint return, they can deduct
$3,000, which is the smaller of their loss or the net capital loss
limit.
If Bob and Gloria's capital loss had been $2,000, their capital
loss deduction would have been $2,000, because it is less than the
$3,000 limit.
Capital loss carryover.
If your total net loss is more than your allowable capital loss
deduction, you may carry over the excess to later years until it is
completely used up. To determine your capital loss carryover, subtract
from your total net loss the lesser of:
- Your allowable capital loss deduction for the year, or
- Your taxable income increased by your allowable capital loss
deduction for the year and by your deduction for personal exemptions.
If your deductions exceed your gross income, you start the
computation in (2) above with a negative number.
Use the Capital Loss Carryover Worksheet in the Schedule
D instructions to figure your capital loss carryover.
When carried over, the loss will keep its original character as
long-term or short-term. Therefore, a long-term capital loss carried
over from a previous year will offset long-term gains of the current
year before it offsets short-term gains of the current year. For more
information on figuring capital loss carryovers, get Publication 550.
Separate returns.
Capital loss carryovers from separate returns are combined if you
now file a joint return. However, if you once filed jointly and are
now filing separately, a capital loss carryover from the joint return
can be deducted only on the separate return of the spouse who actually
had the loss.
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