When you sell some of your shares in one mutual fund, you might do well to use the “double-category” method. Here, you divide all of your shares of a particular fund into two categories, short- and long-term. Purchases and reinvestments within the past 12 months will be your short-term shares and the others will be long-term.
Then you divide each group of shares by the total cost of those shares, to get your average cost for each category. When you sell, you may elect to treat the disposition as coming first from either category. If the short-term shares are the high-cost shares you can treat them as being sold first, effectively selling the shares you bought most recently. This may result in a relatively low tax bill, or even a tax loss.
Suppose you invested and reinvested $2,000 in ABC Fund within the previous 12 months. Those shares are now worth $1,800. If you use the double-category method and sell $4,000 worth of shares, you can elect to have the short-term shares sold first. Thus, $1,800 worth of shares will come from the short-term (high-cost) category, reducing your tax bill, and $2,200 from the long-term (low-cost) category. The average cost for each category will determine your taxable gain or loss.
