Starting January 1, 2012 new cost basis reporting changes will take effect regarding mutual funds, ETFs, and DRIPs (Dividend ReInvestment Plans). Under the new changes, the IRS will require all brokerages and fund companies to track the purchase and sale price of these assets. These are similar to the cost basis changes for stocks that were put into place at the beginning of 2011.
Cost basis, if you’re not familiar, is the original value (purchase price) of an asset. This value is used by the IRS to determine your capital gains (losses) when you sell shares in a mutual fund, ETF, or stock. Which is why it’s so important to track your investment purchases and sales closely. Using a simple spreadsheet covering: purchase date, invested amount, shares purchased, and sales date, will get the job done.
Which Shares Will Be Impacted?
Every time shares of a stock, mutual fund or ETF are purchased, that transaction is given a share lot ID, also referred to as a tax lot ID. Even if you already own shares, each new purchase is given a separate share lot ID. If you invest money every month into a specific mutual fund, there will be separate share lot IDs for every purchase.
Starting in 2012, all new share purchases in non-retirement accounts will be affected by these cost basis reporting changes. Any shares bought prior to January 1, 2012 will not be affected by these changes. The reason retirement accounts are excluded from the changes is due to the tax advantages of those accounts. Continue Reading…
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