Can I use a different cost basis method than my brokerage for sale of a mutual fund?

[AP44]

Hi all!

I recently sold some mutual funds through my brokerage. They made two mistakes:

1) They sold the oldest lot instead of the six newest ones as requested.

2) They reported the average cost basis instead of the actual cost bases.

This resulted in a huge capital gain instead of a slight loss.

They are willing to fix (1) for me but not (2). The problem is if they fix only (1), then part of the gain will become short-term, which is even worse. But fixing (1) might make it easier for me to report my own cost basis.

The question is: if my brokerage reports the average basis, can I still report the correct basis? I have kept detailed records of all lots, and have not made any sales using average basis before (which would prevent me from changing to actual basis, per IRS). These are all covered shares.

In general, I know I can fill out form 8949 with adjustment code B (incorrect basis), but I want to confirm if this can be done here. In particular, the IRS has rules about making the average basis election with my brokerage and when I can revoke it. Outside of that revocation period, the brokerage is required to use average basis. So perhaps the real question is, does this rule apply to me also, or is it only there to make record-keeping easier for brokerages?

Thanks!

[fanfare]

Refer to IRS Pub 550 Chapter 4, for the rules on mutual funds and when you can change the cost method used.

Note: use the fund's calculations if you don't want to be out of step with what is reported to IRS in this and future years.

[fanfare]

I guess you're already familiar with Pub 550.

Be happy the fund will adjust the lots sold so as to be per your request.

[rjs]

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@AP44 wrote:

In general, I know I can fill out form 8949 with adjustment code B (incorrect basis), but I want to confirm if this can be done here.

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Yes, you can use adjustment code B on Form 8949 in TurboTax. After you enter the basic information about the sale from the 1099-B, a few screens later you will come to a screen that says "Select any less common adjustments that apply." One of the choices is "The cost basis on my statement is incorrect." When you check that box it will let you enter the corrected basis. It will then put the adjustment on Form 8949 with code B.

[AP44]

Thanks! I love your confidence!

I know that I can use code B in general. Do you have reason to believe it is correct in this very specific case? Am I allowed to change the cost basis method myself if my brokerage did not?

[AP44]

I just read this:

> "The taxpayer must report gain or loss using the method the taxpayer elects or, if the taxpayer fails to make an election, the broker's default method."

That seems pretty clear, but in my case both I and the customer service rep believed that I had changed the election. My email from him isn't so explicit about his belief, so it may not be good enough documentation for the IRS.

[fanfare]

When the fund's 1099-B is issued, it should show the correction you requested.

[Mike9241]

from IRS PUB 550

You can figure your gain or loss using a cost basis below 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).

thus if you have never used the average cost basis for the sale of the mutual fund you can use specific identification

[AP44]

@fanfare Schwab is not willing to adjust the cost basis. The only thing they will do is show either the most recent lots or the oldest. Since the basis is the same, both are a large gain. The only thing that differs is whether they are short- or long-term.

[fanfare]

your most recent lots cost you exactly the same amount as your earliest lots ??

[fanfare]

"not willing to adjust the cost basis"

I suspect you are mis-predicting what will happen.

BUT

if you are correct then use the Code B basis adjustment to report  on Form 8949 the correct cost of the lots bought on those days

[fanfare]

@AP44 

I went back to look at Pub 550.

"your most recent lots cost you exactly the same amount as your earliest lots ??"

Yes, if you are using the average basis method.

So, Schwab is correct in its reporting.

You have to elect out of average basis before you sell.

In which case, LIFO is to your disadvantage, you want a Long Term holding period.

[AP44]

@fanfare "your most recent lots cost you exactly the same amount as your earliest lots ??'

No, the way the "average cost" method works is that ALL lots purchased (while that election was in effect) are reported as having the same cost basis, which is the average of all of them. That is the only method Schwab is willing to report on my 1099, for reasons given prior.

[fanfare]

So to answer your original question, finally,

If you choose to report that you elected out, then you will be out of sync with your 1099-B reported to IRS, now and probably always in the future with respect to your current shares, even if you update your election with Schwab to change the method.

[AP44]

@fanfare It is not possible to change the method after a sale has been made using average cost. So yes, I will always be out of sync. The question really is: is the IRS likely to care, or do they get this kind of thing a lot? If they ask why I'm using actual costs, will they accept my explanation?

Perhaps these are questions nobody here can answer for me.