Re: Long Vs Short term sales of Mutual Funds

From: Rich Carreiro <rlcarr@animato.pn.com>
Subject: Re: Long Vs Short term sales of Mutual Funds
Date: Tue, 24 Mar 1998 18:37:56 -0500 (EST)

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>a taxable event. It's the first time I have ever sold shares in a mutual
>fund. Now the tax man cometh and I'm not certain about the best way to
>handle the sale. The mutual fund company reported the sale as using an
>averaged purchase price to determine the taxable gain. With the new tax
>laws that favor long-term capital gains it would seem best to me if I
>identified the shares sold in making the declaration as long or short term.

You can't do that.  To use the specific identification method you must
designate the shares to be sold AT TIME OF SALE (and get an acknowledgement
from the fund company of your instructions, though there are some who say
that latter step is not necessary).  Since you gave no instructions at
time of sale, specific ID is not an option for you.  That leaves you with
the average cost method and FIFO.

>but if it means a lower tax rate it could be to my advantage. I'm also
>concerned about establishing a method and having to stick with that method
>for future trades. Do I have an option as to the method used with a mutual

You can switch between FIFO and specific ID as often as you like.
However, once you use average cost (and you must state it on your
return) you are locked into that method until you liquidate your
position in that fund or you get IRA approval to change methods (which
is not likely).

>fund? Are mutual fund capital gains afforded the same long or short term
>options that stocks have?

Yes.

>When an average price is used does it automatically push the
>transaction into short-term?

No.  Average cost has *no* effect on holding period.  When you use
average cost you are considered to be selling the oldest shares 
first.  You'll have to look to the holding period of the sold shares
to see the long/short-term breakdown. 

What average cost will do if share price has appreciated over the
years is effectively turn some long-term gain into short-term gain by
virtue of giving old shares a higher basis (and new shares a lower
basis) than what their actual basis was.  So I note that if you
totally liquidated your position and the fund price has appreciated
over time, it will generally be to your advantage to use FIFO.  But
you really need to work it both ways and see what comes out best for
you.

Rich Carreiro
rlcarr@animato.pn.com

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