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Author: Richbutnot Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: Mutual Fund Tax Basis Date: 9/20/1998 4:58 PM
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I just sold 65 shares of a mutual I have been contributing to for many years. To reduce taxes, I sold the last 65 shares I purchased and have a letter from my broker stating this. How do I figure the cost basis for the shares I sold? Do I count only the last 65 shares purchased with contributions, or do I also include any shares bought through dividend or capital gain reinvestment. I pay taxes on the dividends and capital gains every year.

Thanks, Rich
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5425 of 121144
Subject: Re: Mutual Fund Tax Basis Date: 9/22/1998 12:37 AM
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[[I just sold 65 shares of a mutual I have been contributing to for many years. To reduce taxes, I sold
the last 65 shares I purchased and have a letter from my broker stating this. How do I figure the
cost basis for the shares I sold? Do I count only the last 65 shares purchased with contributions, or
do I also include any shares bought through dividend or capital gain reinvestment. I pay taxes on the
dividends and capital gains every year.]]

That's pretty much it, Rich. Both.

Somehow you have to track the last 65 shares purchased, however purchased. If they were from reinvested dividends, so be it. If they were from purchases, that's fine also.

But since you have now started with the "specific shares" method, you'll have to stick with that method. So NOW might be a good time to compute the tax basis for each and every share ever purchased, and how it was acquired. You will need to know that down the line should you ever sell any additional shares.

Doing it now will help you down the road if you ever lose or misplace your original mutual fund purchase/reinvestment documents.

TMF Taxes
Roy

SPECIAL NOTE: Remember that this response is not the "last word" on your situation. It is really only a starting point. Make sure to review the "Read This First" post
(http://www.fool.com/School/Taxes/TaxesDisclaimer.htm) for additional information. In addition, many of your questions may already be referenced in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's Money area (http://www.fool.com/money.htm) and check out "Tax FAQs" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov).

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Author: rspires One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5429 of 121144
Subject: Re: Mutual Fund Tax Basis Date: 9/22/1998 1:05 AM
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TMF Fool Roy wrote:
<<Somehow you have to track the last 65 shares purchased, however purchased. If they were from reinvested dividends, so be it. If they were from purchases, that's fine also.

But since you have now started with the "specific shares" method, you'll have to stick with that method. So NOW might be a good time to compute ....>>

What is/are the alternative(s) to the "specified shares" method of computing the cost of purchase?
If you start down that road, can you ever turn back?

Thanks, Dick

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 5448 of 121144
Subject: Re: Mutual Fund Tax Basis Date: 9/23/1998 10:50 AM
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[[TMF Fool Roy wrote:
<<Somehow you have to track the last 65 shares purchased, however purchased. If they were
from reinvested dividends, so be it. If they were from purchases, that's fine also.

But since you have now started with the "specific shares" method, you'll have to stick with that
method. So NOW might be a good time to compute ....>>

What is/are the alternative(s) to the "specified shares" method of computing the cost of purchase?
If you start down that road, can you ever turn back?]]

The alternatives are:

FIFO (First in-first out): As you can imagine, this method uses the cost of shares in the order in which they were purchased. This method is generally the least tax efficient (especially in a rising market and/or for shares held over a long time), but is a little easier than the specific shares method.

Average Cost Per Share: This method takes the total cost of all the shares owned and divides by the total number of shares owned. The result is an average cost per share. While this is by far the EASIEST method, it may not be the most tax efficient.

Double Category Method: This method allows you to separate long term investments from short term investments. Average cost per share is then figured for all short term investments, and then it is figured for all long term investments. This method can be a bit complicated, but is not too bad after you get the hang of things. And it is really pretty tax efficient.

But please note: when using the average cost or category methods, you must be aware of the following restrictions:

1. The shares must be held by a custodian (such as a bank) or an agent (such as the mutual fund company). You are not allowed to hold the shares yourself.

2. IRS can disallow the use of these methods if used as a means of tax evasion (but this is rarely, if ever, seen.)

You should also know that any of these methods can be applied to different mutual funds within one portfolio. However, once a method for a particular mutual fund is chosen, that method must be used for all transactions within that fund. And it can't be changed without IRS consent.

We discuss these methods and provide examples in our new book "The Motley Fool Investment Tax Guide". For additional information on mutual funds, check out IRS Publication 564 at the IRS web site.

TMF Taxes
Roy

Want to learn more about taxes and investing? Then we have a deal for you!! The Motley Fool Investment Tax Guide is now available through Fool Mart. Be the first one on your block to own this masterpiece. There is still time available to do that tax planning (and tax saving) before the end of the year. So just click on this link (http://www.foolmart.com/market/product.asp?pfid=MF+013+I) to read more about this amazing collection of tax information. (Apologies for the shameless plug…but it is a pretty good book). In addition, if you would like to visit the Taxes FAQ (Frequently Asked Questions) area, click on http://www.fool.com/school/taxes/taxes.htm and you'll be right at the home page. Pay special attention to the "archives" section. Check it out. Finally, if you need to get to the IRS web site, click on http://www.irs.ustreas.gov to go directly there.


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