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Posted by joeu2004 on March 18, 2008, 4:14 am
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2007 is the first tax year that I am reporting sales from
mutual funds. I need to decide if I am going to use actual
basis of shares sold or single-category average basis.
(Single-category because that is what the mutual fund
reports in periodic statements. I might as well leverage their
computations. Otherwise, I cannot think of a good reason to
use average basis. Can you?)
My understanding is: once I choose to use average basis,
I cannot change that method "until you get permission from
the IRS" [Pub 564, pg 8]. Right?
However, somewhere (don't remember where) I got the
impression that I can change from actual basis to average
basis at any time. Right?
If so, then given that I am sitting on the fence, I might as
well use average basis this first year and think long and
hard about it for future years.
Does that sound reasonable? Or can anyone provide an
overwhelming reason to use single-category average basis?
--
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Posted by Phil Marti on March 18, 2008, 6:47 am
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"joeu2004" wrote:
> 2007 is the first tax year that I am reporting sales from
> mutual funds. I need to decide if I am going to use actual
> basis of shares sold or single-category average basis.
>
> (Single-category because that is what the mutual fund
> reports in periodic statements. I might as well leverage their
> computations. Otherwise, I cannot think of a good reason to
> use average basis. Can you?)
>
> My understanding is: once I choose to use average basis,
> I cannot change that method "until you get permission from
> the IRS" [Pub 564, pg 8]. Right?
What you left out is that this restriction applies only to this fund, until
you're completely divested of it. You can use average basis for one fund
but a different method for other funds.
> However, somewhere (don't remember where) I got the
> impression that I can change from actual basis to average
> basis at any time. Right?
Correct
> If so, then given that I am sitting on the fence, I might as
> well use average basis this first year and think long and
> hard about it for future years.
You got confused somewhere along the line. While you can switch from
specific to average, you cannot switch the other way, as you just stated
above.
--
Phil Marti
Clarksburg, MD
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by joeu2004 on March 18, 2008, 11:17 pm
Please log in for more thread options > "joeu2004" wrote:
> > However, somewhere (don't remember where) I got the
> > impression that I can change from actual basis to average
> > basis at any time. Right?
>
> Correct
Can someone point me to "chapter and verse"? I couldn't find
that assertion in Pub 564. But I am "sure" that's where I read
it.
> > If so, then given that I am sitting on the fence, I might as
> > well use average basis this first year and think long and
> > hard about it for future years.
>
> You got confused somewhere along the line. While you can
> switch from specific to average, you cannot switch the other
> way, as you just stated above.
Yes. Sigh, I "misspoke". I meant to write: I might as well
use __actual__ basis for now and think about the benefits,
if any, of basis averaging later.
Thanks for the inputs.
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by Barry Margolin on March 19, 2008, 2:32 pm
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> > "joeu2004" wrote:
> > > However, somewhere (don't remember where) I got the
> > > impression that I can change from actual basis to average
> > > basis at any time. Right?
> >
> > Correct
>
> Can someone point me to "chapter and verse"? I couldn't find
> that assertion in Pub 564. But I am "sure" that's where I read
> it.
It's the first sentence of the second paragraph on p.6: "You can figure
your gain or loss using a cost basis only if you did not previously use
an average basis for a sale, exchange, or redemption of other shares in
the same mutual fund."
Furthermore, unlikely many IRS rules, it's completely logical! When you
use an average basis, you're treating all the shares you own (or within
each long/short-term category) as equivalent. If you later try to
identify specific shares to sell, how would you know which shares still
exist in the account and are available to sell? And how would you undo
the averaging to come up with an appropriate cost basis for these shares?
Using the average cost method dilutes the information about specific
cost bases, and you can't get this information back.
--
Barry Margolin, barmar@alum.mit.edu
Arlington, MA
*** PLEASE don't copy me on replies, I'll read them in the group ***
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by joeu2004 on March 19, 2008, 4:57 pm
Please log in for more thread options > > > > However, somewhere (don't remember where) I got the
> > > > impression that I can change from actual basis to average
> > > > basis at any time. Right?
> [....]
> > Can someone point me to "chapter and verse"? I couldn't find
> > that assertion in Pub 564. [....]
>
> It's the first sentence of the second paragraph on p.6: "You can figure
> your gain or loss using a cost basis only if you did not previously use
> an average basis for a sale, exchange, or redemption of other shares
> in the same mutual fund."
That rule says that I cannot change from average basis
to actual basis. Yes, I knew that.
I am looking for a statement that says, either overtly or
in effect, that I __can__ change from actual basis to
average basis at any time.
The statements under the heading "Average Basis" are
not clear on that point, in my opinion. They are:
"You can figure your gain or loss using an average basis
only if you acquired the shares at various times and prices,
and you left the shares on deposit in an account handled
by a custodian or agent who acquires or redeems those
shares."
"Once you elect to use an average basis, you must
continue to use it for all accounts in the same fund."
By the way, I think it is interesting that it says "all
accounts" in the same fund. Surprise! Contrast that
with the "common sense" response to an earlier
question in this forum about FIFO for securities held
in multiple accounts.
> Furthermore, unlikely many IRS rules, it's completely
> logical! When you use an average basis, [... if] you
> later try to identify specific shares to sell, how would
> you know which shares still exist in the account and
> are available to sell?
I never said or implied that it wasn't logical. I also
think it is "logical" that I can switch from actual basis
to average basis for exactly the same reason (or the
converse).
But as has been pointed out many times in this forum,
it is dangerous to rely on "common sense" when it comes
to IRS rules. Hence my desire to "see it in writing" ;-).
For example, see the "surprise!" above. If FIFO does
not apply to the same securities across multiple accounts
(according to previous responses) -- that is, you apply
to FIFO just to the shares in the account in which the
sale took place, which I agree is "logical" -- why should
the use of average basis apply to all accounts in the
same fund?
That's rhetorical. I believe the answer is simply:
because that's what the IRS says. I would be surprised
if there is a "logical" explanation that works for average
basis, but not for actual basis (of which FIFO is one
example).
--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>
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