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Subject:  Re: Mutual Funds, Capital Gains - I'm lost Date:  7/13/1999  4:44 PM
Author:  Bob78164 Number:  17253 of 121774

ChrisPRocks writes (in part):

I recently sold off 2 mutual funds to pay the downpayment on a house I just bought. For arguments sake, lets say I have 3 other funds that I currently have money invested in. I sold the two worst perfoming funds of the 5. However, 1 of the remaining 3 is also doing terribly (and has been for awhile).

My questions: Is it worthwhile to sell this 1 fund and reinvest elsewhere now...or should I wait until next year to avoid additional taxes?

Also, how are taxes figured on mutual funds when I have been paying taxes yearly on the funds? (is there an easy way to calculate what I will be paying?)

I reply:

Welcome to the board! And thanks for checking whether the topic's already been covered. As it happens, it has been, but it's the thought that counts. You might check out the Taxes FAQ, which is linked at the bottom of every message on the board.

To answer your timing question, we would need to know more. The question you need to ask is whether one year's use of the additional tax payment is worth more than the additional returns you would expect in an alternative investment.

As to how taxes are figured, you "simply" need to compute your basis. Reinvested dividends and capital gains are treated like any other purchase. For each mutual fund from which you have made no previous sales, you have four options: FIFO, single-category cost average, double-category cost average, and specific identification. If you have made a sale from that fund, you have no choice -- you must continue to use the method used when you first reported the sale. If you made no election, you defaulted to FIFO. The bad news is that to use specific identification, you must do some paperwork before the sale (I know that this is discussed in the Taxes FAQ), so I doubt that it's available to you for the funds that you've already sold. The good news, though, is that if you sell your entire position, there is no difference between FIFO and specific identification.

Single-category cost averaging will give you the same basis as the other methods, but it might change the allocation between short-term and long-term shares, thereby affecting the characterization of your capital gains. You simply spread your basis evenly across all shares of the fund. Calculate your gains/losses both ways, and choose the method that moves more of your basis to short-term shares. If the fund has been rising, you'll probably find that FIFO is better for you. There is probably no reason to learn double-category cost averaging -- if you have sold your entire position, it will give you the same result as FIFO, and if not, you will be better off choosing specific identification, if you still can.

By the way, if you're having trouble taking the big jump, I suggest a compromise alternative. Move into an index fund. Your results will probably be significantly better, and when you gain more confidence, you can take the next step. Good luck! --Bob
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