Advanced Underwriting Consultants

Question of the Day – June 10

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has purchased shares in a mutual fund account using dollar cost average over the past several years.  If the client decides to sell some of the share that have been purchased, how will the client’s basis be determined for capital gains tax purposes?

Answer: The client should designate which mutual funds shares are being sold, and use the specific basis associated with the designated shares.

Here is an excerpt from IRS Publication 550:

Specific share identification. If you adequately identify the shares you sold, you can use the adjusted basis of those particular shares to figure your gain or loss.

You will adequately identify your mutual fund shares, even if you bought the shares in different lots at various prices and times, if you:

  1. Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and
  2. Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular shares sold or transferred.

You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.

If the client does not identify specific shares that were sold, the general rule is that basis is calculated on a first-in, first-out basis.  And the IRS also gives the client the option to use average basis for mutual fund shares that are sold.  However, if the average basis method is used once, it must always be used for that group of mutual funds shares.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.