Newsgroups: biz.americast.samples
From: americast-post@AmeriCast.Com
Organization: American Cybercasting
Subject: FUND SURVEY
Date: Sat, 29 Aug 92 14:53:54 EDT

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FUND SURVEY

Cost basis 101

By Laura Saunders

Have you got good records on those mutual funds you
bought years ago and have steadily reinvested dividends
in? If you don't, you are asking for trouble.

ONE OF THE attractions of the mutual
fund for busy people is that it elimi-
nates lots of paperwork. A fund lets
you hold a diversified portfolio of 30
stocks without having to keep track of
30 purchase orders and 120 dividend
checks.
 But don't get too relaxed about it.
Investors who lose certain key records
can find themselves in a pickle at tax
time. ''Last year my brother sold a
muni bond fund he had held for
years,'' recalls Grant Thornton CPA
Thomas Ochsenschlager. ''He was
missing information for only one
year-1978-but it took us several
hours to reconstruct it.''
 The bugbear here is ''cost basis,''
which is the price you pay for your
shares. The difference between cost
basis and your selling price is a taxable
gain or loss. For a 100-share purchase
of IBM, all you need to keep in your
filing cabinet is the broker's confirma-
tion. For a $10,000 investment in the
Dreyfus Tax-Exempt Bond Fund,
you probably need a lot more. In all
likelihood, you have asked Dreyfus to
reinvest dividends. Each reinvestment
is a new purchase of a few shares. Thus
your cost basis in a fund could be the
sum of dozens or even hundreds of
numbers. The picture gets still messi-
er if you put in money several times a
year, say through an automatic invest-
ment program.
 What to do? Save all your year-end
statements, which (usually) recapitu-
late all reinvestments and other trans-
actions during the year and show a
distribution total. If, when you sell,
you sell all your shares in the fund, the
bookkeeping is considerable but not
overwhelming. Your cost basis is the
sum of your original investment and
all the reinvested dividends since
then. If you have had the fund ten
calendar years, there should be only
11 numbers to add up to get your
cost basis.
 Note that we have glossed over the
difference between long-term gains
and short-term ones. All gains from
shares held less than a year are short
term; the rest are long term and quali-
fy for a slightly lower tax rate.
 What if you are liquidating only a
portion of your fund account? Reach
for the aspirin and grit your teeth. You
have the option of simplifying matters
a bit by calculating all gains and losses
from an average basis per share. To
get this number, first calculate your
net investment to date: original pur-
chase, plus reinvested distributions,
minus cost basis of earlier redemp-
tions. Then divide that sum by shares
held. If you have both long-term and
short-term gains, you can either use
one average cost for both or calculate
a separate one for each group. But
note that once you elect any one
average cost method, you can't switch
to any other method.
 There are two other methods for
calculating gains or losses from partial
liquidations of fund accounts. One is
first-in, first-out. The other is the
specified-shares method. The latter
will minimize your tax bill, but is
tricky to implement. Read the Inter-
nal Revenue Service's Publication
564 for details.
 If your records aren't good,
chances are that you will overpay your
taxes. All too many fund shareholders
forget to count reinvested dividends
when they sell at a profit, says Arthur
Andersen expert Wallace Head. Thus
taxable gains look larger than they are.
 All this will change if a bill now
working its way through Congress
takes effect. It requires funds to pro-
vide basis records to shareholders.
Already, many load fund sponsors_
including Putnam, VanKampen Mer-
ritt, IDS, Kemper, Keystone and Colo-
nial-tell shareholders what the new
law specifies, which is average cost
basis. Putnam goes further: By the
end of the year it will let sellers choose
whether they want to sell shares with
the highest cost, the lowest cost or
average cost.
 The law won't be retroactive, how-
ever. So follow these guidelines:
 Keep a ledger of your capital assets,
and set aside a page for each fund
account. Write in purchases and year-
ly totals of reinvested dividends. Save
year-end fund statements.
 If there are holes in your records,
ask the fund distributor to fill them.
Vanguard, for instance, has records
going back nearly 50 years. Charges
for the records vary, ranging from
nothing at IDS to about $10 per year at
Fidelity for up to six years before 1990
(records for the most recent two years
are free).
 If you really hate keeping records,
try to keep your funds in a tax-free
account (IRA, thrift plan or Keogh).
That way basis doesn't matter.
 Finally, if all the figuring is more
than you want to deal with and you
intend to make some charitable con-
tributions anyhow, just give away
your fund shares. You will get a tax
deduction for the full market price of
the shares, and the cost basis doesn't
matter to the charity, which is tax-
exempt. But do check to see whether
the gift will subject you to the alterna-
tive minimum tax.
 Or, hold on to funds until you die.
The cost basis of appreciated assets is
automatically stepped up to market
value at death. The only sure ways of
beating the taxman here are by dying
or giving your money away.
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