J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

32.10 Comparison of Basis Methods

Your choice of basis method can have a significant effect on the computation of capital gains and losses when you sell a portion of your shares in a mutual fund (32.9). The following example compares the average cost method to the specific identification and FIFO methods.

Transaction history.

Assume that on February 8, 1993, you made an initial investment of $4,500 for 375 shares in ABC Mutual Fund at $12 per share. Under the dividend reinvestment plan, you reinvested a $400 dividend, received in December 1993, for an additional 40 shares at $10 per share. On June 10, 1994, you bought 350 shares at $15 per share. In December 1994 you reinvested your dividend, this time for 25 shares at $12 per share. On September 14, 1995, you bought 200 shares at $16 per share. On August 17, 2006, you bought 200 shares at $25 per share. You did not reinvest your dividends received after 2004 and did not buy any more shares after August 17, 2006 or sell any of the shares.

Now assume that you are planning to redeem some of your shares in 2013 and are trying to decide whether to use the average cost, specific identification, or FIFO method for figuring basis. Since all of your shares have been held long term, capital gain or loss will be long term regardless of which basis method is used.

You decide to redeem 200 shares on October 18, 2013, when shares are selling at $20 per share. The table below shows your transaction history and following that is a comparison ...