How to sell bond fund shares?

The tax consequence is that you'll have a long-term capital gain (or loss) in the amount by which your sales proceeds exceeds (falls below) what you paid for the shares two years ago. If a gain, the tax incurred by the sale will be no more than 15% of the gain. If a loss, you can use that loss to offset other gains, or if none, to offset ordinary income.

Since you only bought $1000 of the fund, any gain or loss will be pretty small and will have a pretty negligible tax effect.

There won't be any difference between selling it now and waiting five years. Is there a reason you think waiting five years would make a difference?

-- Rich Carreiro snipped-for-privacy@rlcarr.com

I assume you know that Lehman is no more - I believe that this bond fund is now the Barclays Aggregate Bond Fd (EFT) but I am not sure.

When you sell you'll have to report the sale on your tax return on Schedule D, where you report the date you bought it, your cost basis (more on this shortly), the date you sold it and the sale price. The difference between the sale price and your cost basis will be your gain - and this should be a capital gain. And if you've held it more than one year most of it should be Long Term Capital Gain. But there could be some short term gain also. Depending on your tax bracket, your long capital gain rate could be as low as ZERO% or as high as 15%. Short term capital gains are taxed at ordinary income rates and those vary depending on what your taxable income is.

Cost Basis is what you paid for the investment plus any additional trading or investing fees related to the purchase of the investment. You also get to add in any dividends you paid tax on that were reinvested - used to buy more shares of the fund. So if you bought 10 shares for $100.00 per share you spent about $1,000. If that fund paid a $100 dividend in 2007 and again in 2008 AND those dividends were reinvested (you didn't get a check for the money), then your basis in the fund is now $1,200 and you own approximately

12 shares (I have simplified the calculations for illustration purposes).

Now you decide to sell - if you sell 12 shares at $105 each your sale price will be $1,260 - subtract your cost basis of $1,200 and you have a gain of $60. But not all of it is long term capital gain - remember the reinvested dividends bought you more shares - so the shares you originally bought you've held more than a year; the 2007 dividend probably bought a share that you've held more than a year, and while the 2008 dividend probably bought a share, you may NOT have held this share more than a year. So you need to split the sale in two and report long term separate from short term.

In this example - Original purchase of 10 shares @ $100 each = $1,000 First Dividend purchased 1 share at @100 - $100 First reported sale looks like this - Date Acquired - VARIOUS / Date Sold 08/05/09 / Sale Price = 11 shares at $105 for $1,155 / Cost Basis = $1,100 / LTCG = $55

Second Dividend purchased 1 share at $100 so second sale looks like this - Date Acquired (Dividend Date) / Date Sold 08/05/09 / Sale Price = $105 / Cost Basis = $100 / STCG = $5

As far as the consequences of selling now versus selling later, that depends - mainly on what happens in the bond market between now and then and whether or not the fund pays any dividends between now and then. The basics of the calculation won't change but the underlying amounts will almost certainly change - if the fund pays more dividends that you're taxed on but which are reinvested your basis will increase. If the final sale price moves higher you'll sell for more, but if the price falls you'll sell for less - you could have either a profit or a loss depending on what happens in the market.

And regarding what will happen in the market in the next five years - if only you had asked me this yesterday when my Magic 8-Ball was still working I could have told you, but unfortunately my Magic 8-Ball is in the shop today - sorry.

Gene E. Utterback, EA, RFC, ABA

I am assuming this a straight taxable brokerage account, not an IRA of any kind. What did you do with the dividends all along, reinvest or take in cash? You'll have already paid taxes on those.

Over two years, there hasn't been much in the way of increase in price of the shares, so capital gains will be relatively low. If you reinvested, you have make sure that you get a correct cost accounting so you don't pay tax on the dividends again. As it's been with the same brokerage for a short time, they should provide all that for you.

Brian

LOL. I'm such a hands-off investor that I entirely forgot that my AGG shares were based on the Lehman index. I went and checked the chart. I can't believe it lost 12-13% in October, then bounced right back a few days later. Why did it drop so much? Was it due to the Lehman Bros collapse? I guess I don't understand why since it's just an index. For example, if S&P company collapsed, I don't think the S&P 500 index would drop 12%.

For some reason I though long term capital gain tax rate was 5 years, not 1 year.

On Aug 5, 3:48 pm, "Gene E. Utterback, EA, RFC, ABA"

Thanks this makes sense but sounds really complicated to do considering I will only be owing less than $10 in tax to the IRS! When I sell, do I get a statement with all these calculations done for me? I am fairly sure I had dividends reinvested since I never received any check for them.

You're probably thinking of the late 1990s where for a few years we had a lower rate at 1 year and an even lower rate at 5 years.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

When

As far as I know, we are still scheduled to return to those rates in 2011. Here's a CCH Tax Briefing dated May 14, 2009 (so it is both reliable - CCH - and current), asserting that as of now, the lower cap gains rates in EGTRRA (15%/0%) are still scheduled to sunset at the end of 2010, though there are proposals to keep these lower rates for all but the highest tax brackets.

As to what they will (in the absence of additional tax legislation) revert to, here's a table of cap gains tax rates through 2011 (they revert in

2011): short, the "normal" (1 year+) cap gains rate will be 20%, except 10% for those in the 15% and below brackets; while the 5 year plus cap gains rate will be 18%/8%. But remember that there was a small gotcha - that lower rate applies only to assets purchased on or after Jan 1, 2001. Mark Freeland snipped-for-privacy@nyc.rr.com

Personally, I elect to not automatically reinvest dividends simply to avoid the tax reporting hassle. I re-invest dividends manually (like on an annual basis).

It's not obvious that you reinvested dividends. Most ETFs are purchased in a regular brokerage account which has a cash account in addition to the shares you hold. You may very well have received those dividends in cash and they are just sitting in the core cash account.

If that's the case, then you have the same number of shares as you originally purchased and your cost basis is simply what you paid. And you have some cash sitting in the account now in addition to the ETF shares.

But none of us can tell from what you've written. You need to look at your brokerage statement.