Basis for sale of inherited mutual funds after a couple years and mutual fund reinvesting

[Matilda]

I inherited four American Funds in 2023.  I know the basis of the original inheritance.  I did not touch them until I cashed them out end of 2025.  American funds automatically reinvests so my amount of shares has grown.  The 1099B has short term and long term gains for each fund due to the reinvesting.  I know that the basis is the date of death value of my mother.  Do I apply that basis to the reinvested shares as well even though they were technically purchased later.  And are all the shares long term even though the recent ones American funds reinvested in are listed as short term gains on the 1099B.

I think I adjust the 1099B to be all long term with the basis the day my mother died for all shares.  But I want to make sure.  If this is true - What records would I need to keep for the adjustment.  Thank You

[Hi Palms]

It doesn't matter whether or not you touched the funds, the basis is still the fair market value of the shares owned on the date of your mother's passing in 2023. 

Any shares that were acquired, in any manner, after that date have a new basis, which would be the value (purchase price or otherwise) on the date they were acquired.

So, you need to keep records of the FMV of the shares owned as of the date of your mother's passing and also the shares acquired (purchased and reinvested) after that date. Also, any shares that have not been held for longer than 1 year are short-term. 

[Matilda]

So I need to split the mutual fund into separate entries.  One for the original inherited shares, then one for each of the times they reinvested and bought more shares for me.  (every time the basis is different) The last time being a short term investment.  

And I must only put inherited for the original shares because inherited means the basis is set to date of death.   This is getting pretty complicated and won't match the 1099B that fidelity provided although I guess the total will.  Is there an easier way to do this?  I have 4 different mutual funds to do this for.

They put various for date acquired in the 1099-B,  then I guess average the basis out over all the shares - end result - total gain - should be the same as separating them by date except the first is inherited, the rest are reinvested.  

[Hi Palms]

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@Matilda wrote:

So I need to split the mutual fund into separate entries.  One for the original inherited shares, then one for each of the times they reinvested and bought more shares for me.  (every time the basis is different)

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That is correct and it can get complicated or a lot of work and there is really no simple way to handle a situation such as your situation.

Brokerage firms will make the adjustment (if they know) upon death (i.e., marked to FMV on the date of death) and then the shares renivested (which are the result of fund distributions) are "covered shares" and the reported figures should be accurate on the 1099-B. If the firm did not make the adjustment for the date of death, then the total will most likely not be accuate.

[Matilda]

I'm still working on this.  I really want to make this easier so  - will the following work???

I have a spreadsheet so I have all the information.  Luckily its only a couple of years. - but it is also four mutual funds.  If only I knew to shut off the dividend reinvestment.   My question now is can I just separate into three different categories?  Lots of entries for only two years with four funds.  

first - The inherited mutual fund info with the date of death basis.

second - For reinvested dividends over a year - combine each mutual fund's reinvested dividend shares and average out the basis for this long term category.  

Third - For reinvested dividends less than a year -  combine each mutual fund's reinvested dividend shares and average out the basis for this short term category. 

I hope I explained this ok.  Thank you for your help.  If I have to do all the entries for every purchase separately I will do it - I'd just rather not.  In December they have three separate purchases per fund on the same day.  

Thank You.

[Hi Palms]

I'd say you could do what you proposed as the end result is going to be accurate in terms of gains/losses, which is all they really care about. In other words, provided the totals are correct, you should be OK.

[Matilda]

I am entering the correct Cost Basis for the inherited shares, short term, and long term.  I am just entering where you enter the 1099B except the basis I enter does not match the 1099B because that basis is the same for all the shares and is an average. (Inherited, short term, and long term all the same basis.).  Is that the correct way to do it?  Just enter as if the correct data is on the 1099B or is there another form I should use?

Thank You for your help.

[Hi Palms]

First thing (critical) is that ALL inherited shares are deemed to have been held long-term regardless of how long they were actually held. So, the basis is stepped up (or down) to the FMV on the date of death and the holding period is long-term.

[JamesG1]

If the transactions are being entered into TurboTax Online on a one-by-one basis, select How did you receive this investment and report I inherited it.

Select The cost basis is incorrect or missing on my 1099-B.

At the screen We noticed there's an issue with your cost basis..., select I know my cost basis and need to make an adjustment.

Retain your records of the cost basis should a tax authority have a question at a later time.

@Matilda 

[Matilda]

Im sorry. I need clarification. 

My 1099 B from the Fidelity has four funds, two categories each  - short term and long term sales.  The long term sales include inherited funds and dividends that are over a year old.  I have Long term inherited basis, long term dividend investments, and short term dividend investments.  I will do two long term sales 1099B and one short term 1099B per fund.

Do I enter Fidelity's incorrect data to match the 1099B they provided, then select that the basis is incorrect on the form, then when prompted enter the correct basis?  Or do I enter the correct basis in place of the number on the 1099 prior to selecting that the basis provided is incorrect?

Since Fidelity only provided one long term 1099B per fund, I have to add another one so I can report the dividend shares separate from the inherited shares.  In this case, I guess I just put in the correct information because there is not any value on the 1099B to change.

[DaveF1006]

Enter the 1099‑B exactly as Fidelity reported it first. Then mark “basis is incorrect,” and enter the correct basis when prompted. 

For any additional sales that Fidelity did not list separately (like splitting inherited vs. non‑inherited shares), you manually add a new 1099‑B entry with the correct information.

[Matilda]

Perfect.  Thank You!

I did not think about it before, but should my proceeds also match Fidelity's?  Turbotax does not ask about proceeds or ask if you want to change it.