You can choose the “cost basis” method you prefer for mutual fund shares held in taxable account. This choice will take effect next January 1. If you act by year-end, the method you select will be effective for all sales, starting in January.
Here are the choices your fund company will be offering:
* Average cost. Say you own 1,000 shares of ABC fund for which you paid a total of $5,500. Thus, your average cost is $5.50 per share. If you sell 100 shares, your cost for tax purposes will be $550.
* First in, first out (FIFO). With this method, the shares you acquired first will be the first ones sold. If the first shares you bought, years ago, cost $4 apiece, you’ll be treated as if you sold $400 worth of shares, for tax purposes.
* Specific identification, If you make this choice, you can select the shares you’ll sell. This choice must be made at the time of the sale. You might specify the shares you bought at $7 apiece, when the stock market was at its peak, so your cost basis would be $700 on a sale of 100 shares.
The higher your cost basis, the smaller the taxable gain (or the greater the capital loss). Therefore, choosing the specific ID method may help you hold down your taxes on sales of mutual funds, if you make a partial sale of shares that were bought at different times.