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Allocating mutual fund avg basis to ST and LT gains?

I sold my entire investment in a mutual fund that I have been holding and reinvesting dividends in for many years.

I will let the mutual fund tell me what the avg (or total) basis is.

But preliminary information from the broker suggests that "they" (the MF? the broker?) treated the entire basis as long-term, even though some of the reinvested dividends were within the last 12 months before the sale.

Is that correct? Or should the basis be allocated to long-term and short-term in the proportion of the recent reinvested dividends to the total?

For example, if I held and sold 1000 shares, including 100 shares resulting from reinvested dividends during the last 12 months, should the ST basis be

900 times the avg basis and the LT basis be 100 times the avg basis?

Or for mutual funds, are we allowed to treat all of the sold shares as long-term if we are using the avg basis, assuming that at least some of our investment was indeed long-term?

Reply to
qguy
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"Average basis is determined by averaging the basis of all shares of identical stock in an account regardless of how long you have held the stock."

Your terminology is a little off. Averaging together the basis of all the shares does not mean that you "treat all of the sold shares as long-term." You still have to report the sales of the long-term shares and the short-term shares separately, and they will be taxed at different rates. But the basis per share will be the same for the long-term and short-term shares.

See "Average Basis" in IRS Publication 550 for more details.

Bob Sandler

Reply to
Bob Sandler

Thanks. And thanks for the citation. Exactly as I expected. The alternative language was "a little off" because I was trying to contrive something I didn't believe was correct in the first place. But it seems to be what the broker did. Your answer to my other question tells me how to correct this (Form 8949), if the broker will not. It's a complicated situation. The current broker probably just got bad information from a previous broker. Thanks again.

Reply to
qguy

Somewhere down the line, and I've got no idea how it might arise, the IRS is going to tell a taxpayer that he, the taxpayer, has to explain *why and how* the broker's information, as reported to the IRS, is incorrect. Is everybody ready for that day? Color me cynical it you must, but consider what an IRS challenge to the taxpayer's basis records might entail, it an IRS bully asked the taxpayer to refute the broker's information. Keep everything, trust no one, kiss your CPA.

Reply to
lotax

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