Posts Tagged ‘cost basis’

Cost basis methods

November 7, 2013

I was trying to understand the current rules for assessing gain or loss on the sale of part of an account’s holdings in a particular mutual fund.  And while I won’t go into the nitty-gritty, I thought it was worth remarking that people who think they know what the rules are, offer assessments which conflict with one another’s.  I’m talking about people who work for brokerage firms and people who write explanations online on reputable websites, purporting to explain the rules.  They can’t all be right simultaneously.

Some seemed not to distinguish between what is the IRS’s default method and what is a particular firm’s internal choice of default method.  Or so it seemed to me.  When must a selection or a change in selection of method be made in writing by an investor?  How does a method used for one sale affect the choice of methods for future sales from the same fund in the same account?  How does it impact the valuation of remaining shares?  The sources I looked at varied on these issues or confused them, and it wasn’t just because the rules changed for shares bought after a certain date.

My sense is that we develop systems that are too complicated for many of the people who are involved with their use and implementation to understand adequately.  Plenty of small-fry people own shares of mutual funds, people who may not use accountants or financial managers or tax advisers.  The complexity of the rules may give them more choices and ways to reduce their taxes, but confuse them.  If the people who work in the field professionally have trouble explaining how the rules play out in practice, then, I think all the more that something is amiss.