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Cost Basis
Definition of Cost Basis
Cost basis is the amount paid to purchase mutual fund shares, including purchases from reinvested dividends or capital gains. Cost basis is important for tax purposes because it is used to determine the amount of gain or loss when shares are sold. In general, gains are taxable and losses may be used to decrease gains (i.e. lower the taxable amount). The calculation is simply the net amount received from the sale of shares less the cost basis of those shares. If the result is a positive number, then you have a taxable gain. If the figure is negative, then you have a loss. One important note to remember: if you sell shares and have a loss, then you may not subtract the loss from gains if you purchase a “substantially identical” security within 30 days of that sale date. That is known as a wash sale. The term “substantially identical” is not well defined by the IRS, so for additional details, please contact your tax accountant or consult IRS Publication 550 at www.irs.gov.
Terminology
Share Lot: Group of shares purchased at the same time.
Short-Term Gain/Loss: Gain or loss on sale of shares held for 12 months or less, taxed at ordinary income tax rates.
Long-Term Gain/Loss: Gain or loss on sale of shares held for more than 12 months. Taxed at long-term capital gains tax rate (typically lower than the rate for ordinary income).
Description of Cost Basis Methods
Example
The following example will be used to illustrate gains/losses within each of the cost basis method descriptions below.
| Purchases | Amount | Share Lot Information |
| 100 shares January 5, 2010 @ $10/share = | $1,000 | share lot #1, long-term |
| 200 shares August 20, 2010 @ $11/share = | $2,200 | share lot #2, long-term |
| 100 shares October 12, 2010 @ $8/share = | $800 | share lot #3, short-term |
| 100 shares February 10, 2011 @ $10/share = | $1,000 | share lot #4, short-term |
| 500 shares purchased for a total of: | $5,000 |
Calculation: Proceeds from sale – Adjusted Cost = Gain or Loss
| Method | Example | Potential Benefits |
| Average Cost (AVG): The total cost of all shares acquired is divided by the total number of shares purchased to arrive at an average cost per share. The oldest shares are sold first. | Average cost is $5,000 divided by 500 shares = $10/share. If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $1,000 (100 shares @ $10/sh) = $200 long-term gain. The oldest shares, from share lot #1, are sold first. | Tends to smooth out the gains or losses over the life of the account. |
| First In First Out (FIFO): Oldest shares are sold first. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200- $1,000 (100 shares @ $10/sh from lot#1) = $200 long-term gain. | May help keep gains in the “long-term” category, which are typically taxed at a lower rate than short-term gains. |
| Specific Lot ID (SPEC): Shareholder must specify (in writing) each share lot to be sold at the time of each sale. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $1,100 (100 shares @ $11/sh from lot #2) = $100 long-term gain. Assumes shareholder specified shares from lot #2. | Maximum control. Allows the seller to choose “long-term” or “short-term” and higher or lower cost shares. |
| Last In First Out (LIFO): Newest shares are sold first. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $1,000 (100 shares @ $10/sh from lot #4) = $200 short-term gain. | Will generate short-term losses (if any) or minimize gains if market returns have been positive for an extended time. |
| Highest In First Out (HIFO): Highest cost shares are sold first, regardless of when acquired. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $1,100 (100 shares @ $11/sh from lot #2) = $100 long-term gain. | Will generate the greatest amount of losses or least amount of gains and could be short- and/or long-term. |
| Lowest In First Out (LOFO): Lowest cost shares are sold first, regardless of when acquired. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $800 (100 shares @ $8/sh from lot #3) = $400 short-term gain. | May be helpful for timing purposes (e.g. if losses are available or if seller is temporarily in a low tax bracket). |
| Highest Long-Term First Out (HILT): Highest cost long-term shares are sold first. Short-term shares are sold only if no long-term shares exist. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $1,100 (100 shares @ $11/sh from lot #2) = $100 long-term gain. | For sellers who wish to minimize gains or maximize losses within the long-term category. |
| Highest Short-Term First Out (HIST): Highest cost short-term shares are sold first. Long-term shares are sold only if no short-term shares exist. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $1,000 (100 shares @ $10/sh from lot #4) = $200 short-term gain. | For sellers who wish to minimize gains or maximize losses within the short-term category. |
| Lowest Long-Term First Out (LILT): Lowest cost long-term shares are sold first. Short-term shares are sold only if no long-term shares exist. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $1,000 (100 shares @ $10/sh from lot #1) = $200 long-term gain. | May be helpful for timing purposes for sellers who wish to maximize gains or minimize losses within the long-term category. |
| Lowest Short-Term First Out (LIST): Lowest short-term shares are sold first. Long-term shares are sold only if no short-term shares exist. | If 100 shares are sold September 1, 2011 @ $12/share: Proceeds of $1,200 – $800 (100 shares @ $8/sh from lot #3) = $400 short-term gain. | May be helpful for timing purposes for sellers who wish to maximize gains or minimize losses within the short-term category. |
Above descriptions and examples are for informational purposes only and do not constitute tax advice. This information is not intended or written to be used in connection with the promotion, marketing or recommendation for the purpose of avoiding U.S. tax-related penalties. Please consult with your tax adviser regarding the appropriate cost basis method(s) for your tax situation. Sit Mutual Funds investor services representatives are not licensed tax advisers and cannot give tax advice. Please consult your tax adviser to determine which method may be best for your situation.
Questions? Call us weekdays between 7:30-5:30 central time at 800-332-5580.
Sit Cost Basis Election Form
To select the method of cost basis calculation for your Sit account use the Cost Basis Election Form.
Find Your Current Cost Basis
Current cost basis data is available through Account Access. If you click on any fund in your portfolio, you will have the option of viewing the “cost basis details” in the right side panel.
Investor service representatives can also provide current cost basis information. They can be reached at 1-800-332-5580, weekdays between 7:30 a.m. to 5:30 p.m. central time.