Tax Center: Cost Basis
New IRS Cost Basis Reporting Regulations Information You Need To Know
New Cost Basis Reporting
Legislation, enacted in October 2008 as part of the Emergency Economic Stabilization Act, requires mutual fund companies to report to the Internal Revenue Service (IRS), on Form 1099-B, cost basis of shares sold or exchanged from a non-retirement account. In addition, the regulations require the reporting of the customer's adjusted basis and whether any gain or loss on the sale is short-term or long-term. These changes are effective beginning January 1, 2012, ("effective date"). This applies to shares purchased on or after January 1, 2012 and are known as "covered" shares.
Definition of Cost Basis
Each time you redeem shares from your account there is a gain or loss associated with that redemption. If a mutual fund is sold for a profit; the capital gain is the difference between the net sale price of the fund and its net cost, or cost basis. If a mutual fund is sold below its cost, the difference is a capital loss. The shareholder must pay taxes on the capital gain for the year in which the fund was sold; conversely, the shareholder may be able to claim a tax deduction for a capital loss, to offset a gain.
Accounts that Are Impacted
Only non-retirement accounts subject to IRS Form 1099-B reporting that fall under the new regulations are considered eligible for cost basis reporting. Accounts that are not subject to Form 1099-B reporting are not impacted by the changes. These are generally IRAs and other retirement plan accounts as well as money market fund accounts.
Covered vs. Non-covered Shares
Non-covered shares are shares that were acquired before the effective date. Such shares are grandfathered and mutual fund companies are not required to provide mandatory cost basis reporting for these shares. Although these shares are not covered under the new requirements, you will be required to report them when you prepare your federal tax return. As in the past, Virtus will not provide the cost basis of non-covered shares to the IRS, but will continue to provide Average Cost information to you, if available, for eligible accounts as a service.
In the event you need to request the account history for your non-covered shares, which will provide the necessary information needed to calculate your cost basis, we ask that you complete our Transcript Request Form . Please be advised, depending on the number of years requested, there may be a fee involved. Please refer to the form for the applicable fees.
Covered shares are shares purchased to eligible accounts after the effective date and are subject to mandatory cost basis reporting. The cost basis reporting information for covered shares will be included on Form 1099-B to you and to the IRS, as required by law.
Electing or Changing Cost Basis Method
There are several cost basis method options you may choose from. Because of the complexities of the different methods, we strongly encourage that you consult with your tax professional when deciding on a method. Information can also be obtained by visiting the IRS website.
Virtus Mutual Funds selected the Average Cost method as our funds’ default method. If you would like to use Average Cost as the method for your covered shares, you do not need to do anything at this time. Your account will default to the Average Cost method unless you elect another method. We provide many IRS-approved methods for determining your cost basis on covered shares – each method has different tax implications.
You may choose to elect one of the following Cost Basis calculation and depletion methods:
| Default Method | Description |
|---|---|
| Average Cost | Determined by dividing the total cost of the shares owned at the time of the sale/exchange by the total number of shares owned to produce an average cost per share. Shares acquired first are sold first to determine your holding period. If you would like to use Average Cost for your covered shares, you do not need to do anything. If available, average cost will be calculated separately for your non-covered shares. |
| Other Methods | Description |
|---|---|
| First In, First Out (FIFO) | Shares acquired first are sold first. |
| Last In, First Out (LIFO) | Shares acquired last are sold first. |
| High Cost In, First Out (HIFO) | Shares with highest purchase price are sold first. |
| Low Cost In, First Out (LOFO) | Shares with lowest cost basis are redeemed first. |
| High Cost Long-Term In, First Out (HILT) | Shares with the long-term highest cost available are sold first. |
| High Cost Short-Term In, First Out (HIST) | Shares with the short-term highest cost available are sold first. |
| Low Cost Long-Term In, First Out (LILT) | Shares with the long-term lowest cost available are sold first. |
| Low Cost Short-Term In, First Out (LIST) | Shares with the short-term lowest cost available are sold first. |
| Specific Lot Depletion | You identify specific shares to sell, exchange or transfer at the time of each transaction. The original purchase dates and prices of the shares you choose will determine your cost basis and holding period. |
Updating Your Cost Basis Method Election
If you have not elected a cost basis method, you may retroactively change the fund’s default of average cost to another method before the settlement date of the first redemption, exchange, or transfer by logging into your account at Virtus.com, by completing a Cost Basis Election Form or by submitting your request in writing. Requests to change to or from the Average Cost method must always be in writing. Note: IRS regulations do not permit the change of a cost basis election on trades that have already been executed.
When You Redeem Shares
When you redeem shares from your account using the Average Cost or FIFO method, we will deplete your non-covered shares first. Other methods will deplete shares as your elected method specifies. For all covered shares sold the cost basis will be calculated according to your Cost Basis Method Election. If you do not designate the cost basis reporting method to be used prior to or at the time of your redemption, the trade will be processed using our default method of Average Cost.
Tax Reporting
If you redeem eligible covered shares from your account in 2012 or later, the Form 1099-B that you will receive will provide cost basis and gain or loss information specific to the covered shares redeemed. As a service, we will continue to report to you Average Cost basis data, if available, on non-covered shares as well. The non-covered shares data is for information purposes and is not reported to the IRS. Cost basis reporting on covered and non-covered shares will be separate.
We strongly encourage that you consult your tax professional if you have any questions about your cost basis reporting options. Information can also be obtained by visiting the IRS website.
IRS Circular 230 Disclosure: Any information contained in this communication (including any attachments) is not intended to be used, and cannot be used, to avoid penalties imposed under the U.S. Internal Revenue Code. Individuals should seek independent tax advice based on their own circumstances.