May I use the average cost of both covered and uncovered mutual fund shares in reporting the gain, or must I compute the gain for each category?

[pmisiaszek]

The average cost of the covered shares is considerable higher that the uncovered shares.  The fund company split the proceeds of the transaction with the result that TurboTax computes the transaction as two sales, with a gain that is considerably higher than it would be if I simply used the average cost per share of all of the shares on the date of the transaction.

[ToddL · Accepted solution]

The only "category" that should make a difference in calculating gain is whether the transactions were short-term or long-term. The overall gain (short-term plus long-term) should be the same whether you use average cost or specific lots, as long as your average cost calculation is correct.

If the sale of both lots (covered and non-covered) had the same character (i.e long-term or short-term), you can use the average cost for all the shares to calculate your gain. 

Otherwise, you would have to calculate the average cost of the short-term holdings, whether covered or non-covered, and the average cost of the long-term holdings, whether covered or non-covered.

[pmisiaszek]

Thanks.  Yes, both lots are long-term.  The mutual fund company calculated the average cost for categories, no doubt as a convenience.  But the difference in gain is considerable.

[pmisiaszek]

Thanks.  Yes, both lots are long-term.  The mutual fund company calculated the average cost for categories, no doubt as a convenience.  But the difference in gain is considerable.

[ToddL]

How are you calculating the average cost per share of all of the shares on the date of the transaction? It is not (average cost of covered + average cost of uncovered)/2. You have to weight the cost by the number of shares.

[pmisiaszek]

In June, I sold roughly 7000 shares.  1600 were covered and 5200 were uncovered.  All were long term.  I computed average cost per share by adding total cost for all of the shares on the date of sale and dividing by the total number of shares held on that date.  I used that number as average cost per share and multiplied it by the number of shares number of shares sold in determining what my total gain was..

[ToddL]

Are we confusing "cost" (what you paid) and "sales price" (what you sold them for)? The cost for the shares has nothing to do with the date of the sale.

[pmisiaszek]

Sorry.  That was, I suppose, inartfully worded.  In June, I had roughly 12000 shares that I purchased over a couple of decades.  All of the shares were long-term.  I sold 7000 shares.  Some of those shares were covered, some weren't.  In trying to predict my what my taxable gain would be, I added up what I paid for all of the shares I held on the date of sale, then divided that by the total number of shares I held on that date.  I believed that to be my average cost per share.  I multiplied that number by the number of shares I sold, then subtracted that number from the proceeds of the sale believing that to be my taxable gain from the transaction.  If the transaction is split into two "sales," one of the protected shares and one not protected, the average cost per share of the larger block is driven down resulting in more taxable gain.

[ToddL]

Give me some time to mull over this - I have to take a required break.

[curious-george2]

This is exactly my question.  It will be a common question for buy and hold accumulators starting prior to January 1, 2012 when they begin to shift to consumers of their savings / investments.  

It must be hard to answer, as the answer is hard to find on these message boards.

The mutual fund companies report two cost basis values, one for covered shares and one for non-covered shares.  The IRS asks you to specify whether the shares being sold are covered or non-covered on both form 8949 and Schedule D.  

It seems logical to use the two different values for cost basis.  

But, you could calculate the cost basis of all shares sold (irrespective of covered and non-covered status) and use that cost basis in both 8949 forms.

That's the question - which way is correct?

[fanfare]

if you sold covered shares the basis is reported to the IRS. You have to use that value unless you are going to claim it is wrong.
That leaves the un-covered shares.
the un-covered basis can be relied on if the broker supplies it.

the two  figures should add to your total investment in the fund, including reinvested dividends, which is why you want to use the broker numbers. most people don't track reinvested dividends.