Re: Selling Mutual Fund shares

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: Selling Mutual Fund shares
Date: Thu, 3 Dec 1998 18:46:19 -0500

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>(minimum required) of the second fund to start my account. I assume that
>I "sold" $500 worth of the first fund to purchase into the second fund.

I take this to mean you told the fund company to "transfer" $500 from
Fund 1 to Fund 2?

>Am I correct in assuming this to be a taxable event?

If this was not in a taxable account, then yes, it is a taxable event.

>Will I get documentation from the fund family detailing this for my income
>taxes for this year? 

The fund will send you (and the IRS) a 1099-B showing the proceeds of the sale.
It is your job to determine the basis of the shares.  Some funds are helpful
and provide you (but not the IRS) a single-category average cost statement.
Others do not.  If you do get one, you are in no way obligated to use it.

>I didn't specify which shares to sell so do I take an
>average share price to figure out my gain/loss?

Since nothing was specified, you must use either FIFO (you are deemed
to sell the oldest shares first and use their actual basis) or an
average basis method (you are deemed to sell the oldest shares first
but use a basis averaged across all shares).  

Once you choose an average basis method for a fund, you are obliged to use it
until you've totally liquidated your position in the fund.

For an amount as small as $500 of sales, I'd probably just use FIFO, even
though it may cost you a bit more in taxes.  Why?
1) It'll be simpler.  Just look what you paid for the first N shares
   you bought (where N is the number of shares you sold).  No having to
   add up the total basis of all purchases and reinvestments (which
   admittedly you won't have to do if the fund does it for you).
2) It preserves your options.  Using FIFO now in no way requires you
   to use FIFO in the future, whereas using averaging locks you into
   averaging for that fund.  Since you only sold $500 of the fund, your
   gain will presumably be significantly less than $500, and your taxes
   will only be 20% (or maybe even 10%) of that.  For pocket change like
   that, why close off the ability to sell specific shares in the future,
   which could save you a lot in taxes at some point.

Rich Carreiro
rlcarr@animato.pn.com
P5-100/RedHat Linux 4.2

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