From: ask@cbnews.cb.att.com (Arthur S. Kamlet)
Subject: Re: Fund basis?
Organization: AT&T Bell Laboratories,  Columbus, Ohio
Distribution: usa
Date: Tue, 5 Jan 1993 22:06:11 GMT

In article <C0E5GA.Ip9@icon.rose.hp.com> alan@hprnd.rose.hp.com (Alan Berkema) writes:
>
>I have not found a good explanation of how to calculate the cost basis of 
>a mutual fund when it goes x-dividend in the current FAQ. I have included
>an explanation form a previous FAQ on mutual funds but it is still not clear.
>I have already requested the IRS publications mentioned.
>An example might help. 
>
>------------------
>
>10 shares with NAV = $10.00 per share
>x-dividend          = $1.00 per share
>taxable income     = $10.00


I think you are saying that there was a $1.00 dividend declared,
which was reinvested.  You used this $1 to repurchase new shares of
stock.

You do not say what you paid for the original 10 shares. That
information is important.   Let me assume for this example you paid
$10 per share or $100 total for your shares.

The cost basis before the dividend was $100.  $10 per share.

If you took the dividend in cash and did not reinvest it, then your
cost basis of those 10 shares would remain $100.

>now have 11.11 shares at $9.00
You own 11.11 shares at a total cost basis of $110.

Since you reinvested the $10, you now own 11.11 shares and your cost
basis -- what you paid for them -- is $100 + $10  =  $110.

 Your "Running Average" (see below) cost basis per sahre is
   $110/11.11 =$9.90

 Or your cost basis for the 1.11 new shares is $10/1.11 = $9.00/share
 and your cost basis for the original 10 shares remains $10.00/share

Your job is to choose the cost basis you want.  There's more than
one method.


>What if I wait a few years before I sell and the process repeats?


If you continue to reinvest your dividends you add those
reinvestments to your total cost basis.

The tricky part is if you sell some but not all of your shares.

You have several methods you can use to determine your cost basis
for the shares in this fund:

  First-In/First-out

      Here you attribute a cost basis to the first n shares,


      your cost basis for the 1.11 new shares is $10/1.11 = $9.00/share
      and your cost basis for the original 10 shares remains $10.00/share

      If you later reinvest and sell and reinvest and sell, your
      cost basis of new shares continues to fluctuate.  Keep a
      running tally.


  Average-value

      Here you keep a running average of shares bought and sold.

     Note:  Once you select either FIFO or Avergae method for this
     fund, you cannot change the method for this fund.  You can use
     another method for another fund, however.

  Identified shares.

     If the fund manager will accept an order to sell specific
     shares  (The 7.23 shares purchased with reinvested dividends
     on November 18, 1993 - as an example --)  and will so identify
     them on your statement, you can use the exact cost of those
     shares as your cost basis.

  (I have heard some people say LIFO is permitted, but my references
    seem to indicate only these three methods.  If someone has current
    authoritative  references, however, please add that.)


Of course, if you sell all the shares in your fund at once, you
don't have to worry about choosing any method of calculating cost
basis.
-- 
Art Kamlet  a_s_kamlet@att.com  AT&T Bell Laboratories, Columbus
Newsgroups: misc.invest