Re: CG Rates

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: CG Rates
Date: Mon, 9 Nov 1998 18:23:49 -0500

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>If I sell a mutual fund that I have been dollar cost averaging into, how do
>I determine what my holding period is for capital gains rates?

It depends :-)

>Let's assume the DCA continues up until the sale date and all shares are
>sold.

It still depends :-)

It depends on what method you use to compute your basis, and whether
or not you DCA is irrelevent to the problem.

The basis methods are:

(1) First-in-first-out: This is the default method.  You are deemed to
be selling shares in the order you bought them (i.e. oldest shares
first).  The basis of each block of shares is what you paid for it
(modulo the rare occasion of a return-of-capital distribution), and
you compute holding period of each block separately, based on when you
purchased it.

(2) Specific identification: You must specify AT TIME OF SALE which
blocks of shares you are selling.  It must be acknowledged in writing
by the broker/fund company (preferably on the trade confirmation
slip).  Again, the basis of each block is what you paid for it
(adjusted by any return-of-capital distributions) and you compute the
holding period of each block separately, based on when you purchased
it.

(3) Average cost, single category: This is the method people talk of
when they say "average cost" and is what fund companies use when they
give you basis statements.  The basis of every share is the average
basis of all shares on hand (i.e. total basis divided by number of
shares).  All the blocks of shares "lose their memory" of their
original basis and take on the average basis.  However, for the
purpose of computing holding period, you are deemed to be selling the
oldest shares first and you compute the holding period of each block
separately.

(4) Average cost, double category: This is very rarely used, and to
get any advantage from it you'd have to work with a broker/fund
company that essentially takes specific share orders, and if that's
the case you're better off with (2) anyway.  See IRS Pub 564 for more
details.

You can switch between (1) and (2) at will.  You can switch from (1)
or (2) to (3) or (4), but once you switch to (3) or (4) you are locked
into it for that security until you liquidate your position or get IRS
permission to change (not bloody likely).

Now, even though you have to compute holding period block-by-block,
thankfully you don't have to report the sales block-by-block (unless
you want to :-) on your Schedule D.  Once you figure out which blocks
are long-term and which are short-term, you can report all short-term
sales of a single mutual fund on a single line on Part I of Sched D
and you can report all long-term sales of a single mutual fund on a
single line of Part II of Sched D.  Just aggregate the basis,
proceeds, and gain/loss, report "various" as the acquisition date and
the date of sale as the sales date.

For more details, see IRS Pubs 550, 564, and the Schedule D instructions.

Rich Carreiro
rlcarr@animato.pn.com
P5-100/RedHat Linux 4.1

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