2007 is the first tax year that I am reporting sales from mutual funds. I need to decide if I am going to use actual basis of shares sold or single-category average basis.
(Single-category because that is what the mutual fund reports in periodic statements. I might as well leverage their computations. Otherwise, I cannot think of a good reason to use average basis. Can you?)
My understanding is: once I choose to use average basis, I cannot change that method "until you get permission from the IRS" [Pub 564, pg 8]. Right?
However, somewhere (don't remember where) I got the impression that I can change from actual basis to average basis at any time. Right?
If so, then given that I am sitting on the fence, I might as well use average basis this first year and think long and hard about it for future years.
Does that sound reasonable? Or can anyone provide an overwhelming reason to use single-category average basis?
What you left out is that this restriction applies only to this fund, until you're completely divested of it. You can use average basis for one fund but a different method for other funds.
Correct
You got confused somewhere along the line. While you can switch from specific to average, you cannot switch the other way, as you just stated above.
Can someone point me to "chapter and verse"? I couldn't find that assertion in Pub 564. But I am "sure" that's where I read it.
Yes. Sigh, I "misspoke". I meant to write: I might as well use __actual__ basis for now and think about the benefits, if any, of basis averaging later.
It's the first sentence of the second paragraph on p.6: "You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund."
Furthermore, unlikely many IRS rules, it's completely logical! When you use an average basis, you're treating all the shares you own (or within each long/short-term category) as equivalent. If you later try to identify specific shares to sell, how would you know which shares still exist in the account and are available to sell? And how would you undo the averaging to come up with an appropriate cost basis for these shares?
Using the average cost method dilutes the information about specific cost bases, and you can't get this information back.
That rule says that I cannot change from average basis to actual basis. Yes, I knew that.
I am looking for a statement that says, either overtly or in effect, that I __can__ change from actual basis to average basis at any time.
The statements under the heading "Average Basis" are not clear on that point, in my opinion. They are:
"You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares."
"Once you elect to use an average basis, you must continue to use it for all accounts in the same fund."
By the way, I think it is interesting that it says "all accounts" in the same fund. Surprise! Contrast that with the "common sense" response to an earlier question in this forum about FIFO for securities held in multiple accounts.
I never said or implied that it wasn't logical. I also think it is "logical" that I can switch from actual basis to average basis for exactly the same reason (or the converse).
But as has been pointed out many times in this forum, it is dangerous to rely on "common sense" when it comes to IRS rules. Hence my desire to "see it in writing" ;-).
For example, see the "surprise!" above. If FIFO does not apply to the same securities across multiple accounts (according to previous responses) -- that is, you apply to FIFO just to the shares in the account in which the sale took place, which I agree is "logical" -- why should the use of average basis apply to all accounts in the same fund?
That's rhetorical. I believe the answer is simply: because that's what the IRS says. I would be surprised if there is a "logical" explanation that works for average basis, but not for actual basis (of which FIFO is one example).
Since the rules are stated in the form of restrictions, anything they don't specifically prohibit is implicitly allowed. They don't detail all the things you CAN do, just the ones you can't.
Okay. I know you are right; basic legal principle. It bothers me only because it presumes that I have digested all possible applicable information and know, therefore, that it is not prohibited __somewhere__. The IRS Pubs do not always put all relevant information together in one place -- and "common sense" does not always apply.
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