From: fierro@uts.amdahl.com (Doug Fierro)
Newsgroups: misc.invest
Subject: Calculating tax for Mutual Fund shares
Date: 14 Apr 92 01:13:15 GMT
Reply-To: fierro@amdahl.uts.amdahl.com (Doug Fierro)
Distribution: usa
Organization: Amdahl Corporation, Sunnyvale CA


  I thought some people might find this useful.  Keep in mind I did not
write this!  Typos can be directed to /dev/null :-)

*********************
 Mutual Funds Make Tax Time Miserable
by Jane Bryant Quinn

  Mutual funds are wonderfully simple to buy and sell.  But at tax time,
I wish I'd never heard of them.  The system for calculating profits and
losses is appallingly complicated, especially for investors who make 
regular contributions and reinvest dividends and capital gains.  If you sell
shares and forget to subtract the cost of the shares you bought through
reinvestment (which often happens), you may overpay your tax.

  For years, I'd been asking mutual funds why they didn't give their
customers more help.  Finally, there's a light at the end of the tunnel.
A handful of mutual funds now provide the information you need to simplify
your tax calculation, and Congress may force the rest of the industry to
follow.

  Fund investors have to report the taxable distributions they get from the
fund, including taxable dividends and capital gains.  You also owe a tax
on any profits you earn by selling fund shares for more than you paid. 
If you sell for less, you report a loss.  Your cost for each share includes
sales commission, if you bought the fund with a load.

  Every time you put money into a fund- including reinvested dividends and
capital gains- you are buying new shares.  As time goes by, you accumulate
a huge pile of shares acquired at a wide variety of prices.  When you sell
shares, then, which ones have you sold?  Which cost do you use for figuring
your gain or loss?

  There are two ways of figuring your cost- a (ha ha) simple way and a 
truly complicated way.

  With the (ha ha) simple way, you add up the cost of all your shares, 
including those bought with reinvested dividends, and divide by the number
of shares you own.  That's your "average cost."  You then compare the
selling price with the average cost, to establish your gain or loss.  Every
time you sell shares during the year, you may have to calculate your 
average cost all over again.

  You also have to choose between the single-category method (which averages
all shares together) and the double-category method (which averages long
and short-term shares separately).  In most cases, the double-category
method isn't worth the effort.

  Now comes the truly complicated way of figuring your tax.  Each time
you sell shares, you specify- in a dated letter to the mutual fund- exactly
which shares you want to dispose of.  For example, "Sell the 100 shares
I bought for $8.50 on Jan. 12, 1988."  This allows you to sell the specific
shares that show losses or only small capital gains, which holds down your
tax.  But the bookkeeping is horrendous.

  If you don't specify which of these two methods you're using, the IRS
will assume you've sold the shares you held the longest.  Those are usually
the shares with the highest gains, which tends to maximize your tax.

  Now for the good news.  At least five mutual fund companies are doing the
grunt work of calculating their shareholders' average cost basis (single
category method).  You just multiply that by the number of shares you sold
to get your taxible gain or loss.  The IDS group in Minneapolis has offered
this wonderful service since 1971.  Recently, the Putnam, Pioneer, Oppenheimer
and Colonial mutual-fund families have also seen the light.

  Colonial, IDS and Putnam add something more.  They list your actual
capital gain or loss after each sale.  You just pick up that number and put
it on your tax return, with no further calculation necessary.  Donald 
McCrackin, Putnam's managing director of administrative services, says 
Putnam is also working on a simple system to help you identify specific
shares.

  A provision requiring mutual funds to calculate your average cost was
contained in the tax bill just vetoed by the president.  The proposal
will probably be reintroduced.

  Many funds I spoke with say they're looking into providing average cost
voluntarily.  In the meantime, they may send shareholders an abbreviated
free tax guide.  A good detailed guide costs $5 from the Vanguard Group,
Tax Guide, P.O. Box 2700, Valley Forge, PA. 19482.  Or get the IRS's
free Publication 564, "Mutual Fund Distributions."

-- 
                                                     Doug Fierro
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Newsgroups: misc.invest