The “single-category” method may help you save taxes on mutual fund sales. With this method, all the shares you own will be divided by the total you invested and reinvested That will be the cost you use when you figure out your gain on the sale.
Suppose you have paid $8,000 and accumulated a total of 1,000 shares. Thus, your average cost-per-share will be $8. If you cash in $4,000 worth of shares, when the price is $10, you will be assumed to have a profit of $2 per share.
If you don’t select an special method, you’ll be required to use FIFO (first-in, first-out). In this example, you sold 400 shares of ABC Fund, trading at $10, to raise $4,000. You’ll be presumed to have sold the first 400 shares of this fund you’ve acquired. Thus, if you bought some of those shares many years ago, at a price of, say, $5 or $6 a share, those are the shares you will be presumed to have sold, inflating your tax bill.
On the other hand, if you started to invest in this fund in 1998 or 1999, near the market peak, your first-in shares may be your highest-cost shares. Using FIFO would mean selling those high-cost shares first and perhaps realizing a capital loss.
Crunch the numbers to see which will give you the lower tax bill.
