10.2 Capital Gains, Losses/Sale of Home: Stocks (Options, Splits, Traders)
Can the cost averaging method be used for calculating the cost basis
of stocks, or is it limited only to mutual fund shares?
The average basis method may be used only for mutual fund shares that were
purchased at various times for various prices if the shares are left in the
custody of a custodian or agent in an account maintained for the acquisition
or redemption of the shares.
References:
10.3 Capital Gains, Losses/Sale of Home: Mutual Funds (Costs, Distributions, etc.)
If I previously sold shares of a mutual fund and reported the gains
or losses using the FIFO method, can I switch to an average basis method?
Yes, you can. The only requirement for using an average basis is that 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. An average basis method, once adopted, must be disclosed on
your tax return and the method cannot be changed back without permission from
the Commissioner of the Internal Revenue Service.
Before computing the basis of shares sold using an average basis, ensure
that you have reduced your previous total basis by the cost of the shares
accounted for using the FIFO method.
References:
If I previously reported my mutual fund sales using the FIFO method
and switched to an average basis method, do I include only those shares remaining
after the previous sales to determine the average cost?
Yes. You would include in your average basis calculations only those shares
that were still held at the time of the sale you are reporting.
References:
How do I calculate the average basis for the sale of mutual fund
shares?
In order to figure your gain or loss using an average basis, you must have
acquired the shares at various times and prices and have left them on deposit
in a managed account.
There are two average basis methods:
Single-category method, and
Double-category method.
Single-category method. First, add up the cost of all the shares you own
in the mutual fund. Divide that result by the total number of shares you own.
This gives you your average per share. Multiply that number by the number
of shares sold.
Double-category method. First, divide your shares into two categories,
long-term and short-term. Then use the steps above to get an average basis
for each category. The average basis for that category is then the basis of
each share in the sale from that category.
Once you elect to use an average basis method, you must continue to use
it for all accounts in the same fund. You must clearly identify on your tax
return the average basis method that you have elected to use. You do this
identification by including "AVGB" in column (a) of Form 1040, Schedule D (PDF) .
Refer to Publication 564 , Mutual Fund Distributions, Sales,
Exchanges and Redemptions .
References:
If I own some mutual fund shares less than a year and other shares
more than a year, do I need to do two separate computations for an average
basis method?
If you are electing or have previously elected to use the double-category
method for that mutual fund, you need to do two separate computations; one
for long-term and one for short-term-only. The single-category method requires
only one computation of average basis.
For more information, refer to Publication 564, Mutual Fund Distributions, Sales, Exchanges, and Redemptions.
References:
How do I tell the IRS I used an average basis method in reporting
the gain or loss from my mutual funds?
Either write the name of the average basis method used as a notation on Form 1040, Schedule D (PDF), Capital Gains and Losses ,
or attach a sheet to the Schedule D showing in detail how you computed the
basis of the shares sold. Whenever you attach a statement to your return,
include your name(s) and social security number(s). Also include "AVGB" in
column (a) of Schedule D.
References:
If I used an average basis method for shares of one mutual fund
I sold, do I have to use it for all mutual funds I sell?
No, you may use a different method, as long as you have not used an average
basis method for that fund previously. Once you have elected to use an average
basis method to compute the gain or loss on shares in a mutual fund, you must
use that same method for the sale of shares from any account in that same
fund.
References:
If I use an average basis method for computing basis of mutual fund
shares upon sale, how do I determine the holding period for those shares?
How you determine the holding period of mutual fund shares you sold depends
on which of the two average basis methods you are electing to use. Once you
have elected a method, you must use that method for determining the basis
of any shares sold in the future from that fund.
You may specify top your broker the category from which the deemed shares
are sold. Shares will be deemed sold from that category so long as your broker
provides you with confirmation of the sale. If you do not specify or if the
broker fails to provide confirmation shares will be deemed sold first from
the long-term category.
References:
After the first partial sale of mutual fund shares, are the sold
shares no longer used when updating an average basis method for future sales?
If you used the single-category method, the average per-share basis is
the same for the shares you still hold as the ones you sold. The next time
you sell shares, the per-share basis will remain the same unless you acquired
additional shares in the meantime.
If you subsequently sell some shares and have acquired additional shares
since the last sale, you recompute the average basis. Divide the total cost
of the shares that you hold at the time of sale by the number of shares you
hold at the time of sale.
If you previously used the double-category method to compute an average
basis, you need to transfer from the short-term category to the long-term
category any shares that have been held longer than one year at the time of
a subsequent sale. Transfer the shares at the per-share basis for the short-term
category computed at the time of the last sale, then recompute the average
basis for the two categories. Use the new total cost and total number of shares
for each category.
For more information, refer to Publication 564, Mutual Funds.
References:
How do I calculate the average cost method of a mutual fund if the
fund price splits?
If your mutual fund splits, or adjusts its price, it is treated like a
stock split. Your total basis doesn't change after the split, but since you
now own more shares without paying any more money, your per-share basis will
decrease. To calculate your per-share basis, divide the total cost that you
have invested in the fund (minus any shares previously sold) by the current
number of shares that you hold.
References:
What affect does a stock split for a stock in my mutual fund have
on my cost basis when I am using an average basis method?
If a stock within your mutual fund splits, it has no affect on your basis
because the shares you own are shares in the mutual fund, not in the stock
that split.
References:
How do I receive permission to change my cost basis calculation
to adopt an average basis method?
You do not need permission to elect an average basis method for a particular
mutual fund when you have used a cost basis previously to report the sale
of shares in the fund. If you meet the conditions to use an average basis,
then you just need to clearly indicate on the return for which you want the
election to be in effect that you are making the election. You also need to
indicate which average basis method you are using and that none of the shares
are gift shares. If there are gift shares in the account and the fair market
value of the shares at the time of the gift was not more than the donor's
basis, you must include a statement that the basis for gift shares when figuring
the average basis is the fair market value at the time of the gift.
If you have already reported the sale using a cost basis, you cannot make
this election unless you can do it on an amended return before the due date
of the tax return being amended.
However, you do need the consent of the IRS to use a cost basis or to change
your average basis method once you have made this election to use an average
basis method. This would be considered a change in an accounting method.
You would need to request consent to change your method on Form 3115 (PDF), Application for Change in Accounting Method.
For more information, refer to Publication 564, Mutual Fund Distributions, Publication 538, Accounting Periods and Methods,
Instructions for Form 3115, Application for Change in Accounting Method, Revenue
Procedure 97-27, and Section 9.03 of Revenue Procedure 2003-1.
References:
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