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Average Basis Method - Mutual Funds

Average basis is the average cost of all shares you bought. You can use this method of figuring your basis only if you did both of these:

  • Bought your mutual fund shares at various times and prices
  • Left the shares on deposit in an account handled by a custodian or agent (Ex: A broker or your mutual fund company)

The average basis method should be used only if:

  • You didn’t sell all the shares in the fund.
  • You choose the average basis method for the fund for all prior years. After you choose to use the average basis method for a fund, you must use it for all accounts in that fund. However, you can use different methods for different mutual funds that you own.

The average basis method allows you to vary the amount of your gain or loss for the year when you first choose the method. Over time, the total gain or loss from the sale of all shares of the fund will be the same. It doesn’t matter which method you use to figure the basis.

Most mutual fund companies figure the average basis for you and send you a statement. You can figure the average basis yourself using the single-category method.

Single-Category Method

To use this method:

  1. Total the cost of all the shares you own in a mutual fund.
  2. Divide that result by the total number of shares owned to get the average basis per share.
  3. Multiply that number by the number of shares sold. The shares are considered to be sold in the order you acquired them for purposes of the holding period.

You must refigure the basis for a later sale if you acquire more shares after you initially figure the basis. Ex: You might acquire more shares if you buy or reinvest dividends.

Double-Category Method

You could use this method prior to April 1, 2011. To use this method:

  1. Divide the shares into two categories -- those held long-term and those held short-term.
  2. Divide the total cost of the shares in each category by the number of shares in that category. This will give you the average basis for each category. Unless the shares sold are specifically identified, shares in the long-term category are considered to have been sold first.
  3. Multiply the basis for each category by the number of shares sold from that category.

You must move short-term shares to the long-term category when you’ve held them for more than one year. The basis is usually the cost. However, you might sell short-term shares using the average basis method. If so, the remaining per share basis is the basis used to figure the gain or loss on the sale.

You also must refigure the basis for a later sale if you acquire more shares after you initially figure the basis. Ex: You might acquire more shares if you buy or reinvest dividends.

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