Cost Basis of Uncovered Shares in a Mutual Fund

[JR108]

Hi, 

I sold some shares of a mutual fund online on 2/1/2022. At that time, my selected cost basis was SLID (specific lot ID), and all my shares were shown to be in a single lot, presumably because they were all uncovered shares (purchased before 2011).  I did the transaction online and did not call the Fund to be more specific about which of the uncovered shares I wanted to sell.
As expected, the fund did not report a cost basis on the 1099-B. Since my selected basis was SLID before that sale, can I use any of the following methods for reporting the cost basis to the IRS - a) SLID, b) Average Cost or c) FIFO? In all these three cases, I will rely on my personal documentation of fund purchases and sales that I have ever made. Or am I constrained to use a specific method out of these three? Thank you for your help.

[JohnB5677]

All three can be used, but the IRS default is FIFO.

"If you can't adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is:

• The basis of the shares you acquired first, then the basis of the stock later acquired, and so forth (first-in first-out). Except for certain mutual fund shares and certain dividend reinvestment plans, you can't use the average basis per share to figure gain or loss on the sale of stock."  How do I figure the Cost Basis

Also see: How do I calculate the average basis for the sale of mutual fund shares?

Regardless of which method you use. be sure to maintain the documentation.

If this does not completely answer your question, please contact us again and provide some additional details.

[JR108]

JohnB5677, thanks a lot! I have documentation for all the share purchases, sales and reinvestment of dividends/LT capital gain/ST capital gain, in fact all transaction made since 1992 when I first opened the account with the Fund. The documentation going back to 1995 came from a download from the Fund's website, and the rest is paper documentation that I miraculously seem to still have. 

I will use specific lots if I can, because I can pick the highest cost shares to calculate my cost basis and thus reduce the capital gain. All my gain is long-term gain of course. I know that if and when I sell any shares later, I will be hitting lower cost shares and hence will pay for higher capital gains later. That's fine with me. 

I don't want to use FIFO even if it is IRS's default as long as they allow specific lots too. Note that even FIFO requires documentation. Thanks again. 

[Mike9241]

if you did not specify the lot to be sold even though your default method is SL, you can't use it 

The specific-shares method only works if certain conditions are met. The method requires that the investor has purchased multiple lots of the same security at different prices, is selling only some of the investor’s shares in a stock, and has kept a record of the cost basis of each stock or fund purchase.

Assuming all these conditions, the investor must give detailed information to the broker managing the investor’s account on which shares to sell. Otherwise, the average price paid for all shares of the same stock will form the cost basis, and the investor will end up with a greater tax liability than necessary.

[JR108]

Thanks, Mike! So, I have two different answers to my question above. Nevertheless, the fund has put all my non-covered shares in one lot, and when I called them yesterday, they did not even have specific lot information within that lumped single lot. For example, if I purchased 100 fund shares in 2008 at $10/share and 200 shares in 2009 at $20/share, they show me only one lot of 300 uncovered shares with a cost basis of $5000 (100*10+200*20).

So, even if I tried, I could not have them break open that single lot and allow me to sell specific shares. But I do have that information at home. So, what you are saying is that since I did not specify specific shares at the time of ordering, I am stuck with using average cost. Is that what you are saying? Thanks.

[JR108]

Thanks, Mike. I now have two different answers to my question. In any case, I called the fund and found out that even if I had called them before placing the sell order in 2022, I could not pick specific shares within the single lot that they show for all my uncovered shares. They said I should consult a tax expert to decide what cost basis I can use when reporting to the IRS!

My account settings for costing method have always been Specific Lots (primary) and High Cost First Out (secondary). So, I have been assuming that I could use either of those, but your reply suggests that I am stuck with the average cost method. Given my primary and secondary methods identified above, do you still think so? Thanks a lot for your help!

[JR108]

So, my query essentially remains unanswered because I received two conflicting replies. A call to the Fund company did not help, as they claim that they cannot give tax advice.

John said I could use any of the 3 methods, but Mike said that I must use the average cost method. If I don't receive any other replies in the next 2-3 days, I will submit using the average cost method. 

[GeorgeM777 · Accepted solution]

Ordinarily, the initial cost basis method should not be changed.  Because you elected Specific Share Identification, that is the method you should use; however, through no fault of your own, it appears you cannot satisfy the conditions that Specific Share Identification requires.  The requirements of Specific Share Identification are contained in IRS Publication 550 at page 43, the link to which is included below.   

You mentioned you may use Average Cost.  The IRS considers Average Cost to be an acceptable method.  You can find out more about Average Cost in IRS Publication 550 including how to apply Average Cost in connection with non-covered securities at page 44.

Here is a link to IRS Publication 550.

Investment Income and Expenses

@JR108 

[JR108]

Thanks a lot, GeorgeM777! You are right that due to no fault of mine, I do not meet the conditions for using the specific lot method. This means that I cannot use it even though that will lower my capital gain, hence tax. Under the circumstances, I am fine with using the average cost method.