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tax

Tax Time Help

Changes to Cost Basis Reporting

In this section:

As part of the Emerging Economic Stabilization Act of 2008, mutual fund companies will be required to report cost basis for mutual fund shares purchase in taxable accounts after January 1, 2012 to the Internal Revenue Service (IRS). 

Cost basis is the price you pay for fund shares, whether as a standalone purchase or for purchases made through reinvested dividends and distributions, and is used to determine capital gains or losses when you latter sells those shares.  Capital gains and losses on fund shares in taxable accounts must be reported to the IRS for tax purposes. 

Under new IRS rules, Wasatch is required to report cost basis when you sell covered shares (shares purchased on or after January 1, 2012) in a taxable account.  Unless otherwise instructed, Wasatch will use the Average Cost method to calculate and report your cost basis.  The Average Cost method calculates cost basis by averaging the share price for each purchase into one price per share.  Once the average cost per share is determined, the shares are redeemed on a First-In, First-Out basis.

The Wasatch Funds default accounting method is Average Cost.  If you are currently using the Average Cost calculation provided to you, and you would like to continue receiving Average Cost, NO ACTION is required.

To choose a cost basis method other than the Wasatch default of Average Cost, you must submit a completed Cost Basis Method Election Form. The cost basis method you select may help you take advantage of gains or losses depending on your situation.  We suggest you consult with your tax advisor to determine which method is best for you.

What is Cost Basis?
Why Do I Have to Calculate Cost Basis?
What is Mandatory Cost Basis Reporting?
What is a Cost Basis Method?
What is a Tax Lot?
When Does the New Reporting Begin?
What are Covered and Non-covered Shares?
Do I have to Select a Cost Basis Method?
What Do I Need to Do as a Shareholder?
What is Cost Basis Election by Account?
What Cost Basis Method Will Be Applied to My Existing Shares and Can I Change Methods?
What Cost Basis Methods Do I Have Available for My Fund Shares?
When and How Will Wasatch Report Cost Basis Information to Me?
Why Do My Cost Basis Records Differ from those Provided by Wasatch?
If I Wish to Change from Average Cost to Another Method, Can I Do That?
How Do I change My Cost Basis Method?
Will Changing My Cost Basis Method Affect Past Sales?
Where Do I Report Cost Basis Information?
Is Cost Basis Information Available for All Account Types?
What Are "Wash Sales," and Does Wasatch Track Them?
How Will Shares Be sold in My Account If I Have Both Non-covered and Covered Shares?
How does Wasatch Calculate the Default Average Cost Method for Shares?
How Will Corporations Be Treated as It Relates to the Changes in Cost Basis Reporting?
Where Should I Send My Completed Wasatch Cost Basis Election Form or Letter of Instruction?
Whom Do I Contact With Questions?

What is cost basis?
Generally, cost basis is the original price that you paid for your shares and is used to determine gains and losses on any shares you redeem or exchange in a taxable (non-retirement) account. You use your cost basis to determine if you have a capital gain or capital loss at the time you sell your shares. A capital gain is when the selling price is greater than the purchase price. A capital loss occurs when the selling price is less than the purchase price.  For taxable investment accounts, you must report capital gains and losses to the Internal Revenue Service (IRS). Cost basis may be adjusted by various tax items including return of capital and wash sale rules.

Why do I have to calculate cost basis?
The IRS requires you to report your gains or losses calculated when you sell shares. Keeping track of your cost basis is an integral part of calculating your capital gain or loss.

What is Mandatory Cost Basis Reporting?
Congress passed the Emergency Economic Stabilization Act on October 3, 2008, which requires brokers, and mutual companies, to report adjusted cost basis information to the IRS and you on Form 1099B when you buy and sell shares after January 1, 2012.    The legislation also requires that the new Form 1099-B indicate if the gain or loss is short-term or long-term, and the amount of any loss disallowed under the wash sale rules.

If you acquire and sell a security in a taxable account on or after January 1, 2012, Wasatch will report cost basis for the security sold to you and the IRS on Form 1099-B.  If you have mixed covered and non-covered positions (see definitions below) in the same mutual fund, Wasatch will report cost basis to you and the IRS for any covered positions that are sold.  Wasatch will apply its mutual fund default method (Average Cost) unless you inform us of a preferred cost basis method. 

What is a Cost Basis Method?
A cost basis method is an accounting method used to determine how shares in your account are depleted upon redemption or exchange and for purposes of calculating the basis and therefore the gain or loss on those shares. The cost basis method you select will determine both the depletion order of the shares which are redeemed or exchanged and how your cost basis information is calculated and subsequently reported to you and to the Internal Revenue Service (IRS).

The cost basis method you elect is generally only applicable to shares acquired after January 1, 2012 and can be changed at any time, prospectively. Failure to elect a cost basis method may limit the options available to you at the time of a redemption or exchange. If a cost basis method has not been elected, your account will default to Wasatch’s default method (Average Cost). A cost basis method election will apply to all identically registered accounts unless you inform us otherwise.

What is a tax lot?
A tax lot consists of shares of a mutual fund purchased at the same price on the same day.  The cost basis method determines which cost basis lots are sold first.

When does the new reporting begin?
January 1, 2012

What are Covered and Non-covered Shares?
Covered shares are shares containing an IRS requirement to report basis to you and the IRS on Form 1099-B upon redemption or exchange. Covered shares generally consist of shares acquired after the January 1, 2012 legislation effective date.

Non-covered shares DO NOT contain an IRS requirement to report basis to you or the IRS on Form 1099-B upon redemption or exchange. Non-covered shares generally consist of shares acquired prior to the January 1, 2012 legislation effective date.

Do I have to select a cost basis method?
For covered securities sold, you do not need to do anything if you would like your cost basis method to be average cost, the Wasatch default election. To insure proper processing of covered shares, Wasatch encourages you to make your election early if you would like a method other than average cost.

What do I need to do as a shareholder?
If you prefer to use average cost as your cost basis method, then no further action is required.  However, if you’re not sure which method to use, Wasatch strongly encourages you to consider meeting with a tax professional to determine the method most appropriate for your situation.  You should consider your own needs and choose the option that is right for you.

What is the cost basis default election?
The default election is a method Wasatch Funds has selected for tracking cost basis of covered shares in the event you have not made an account election.

What is cost basis election by account?
Cost basis election by account is when you select account-by-account the method you would like used to calculate cost basis.  Redemptions will use the account cost basis election unless you direct otherwise by the execution of the trade.

What cost basis method will be applied to my existing shares and can I change method?
You may not switch from average cost to another method for shares purchased before January 1, 2012.  However, you may choose a different method for shares you purchase on or after January 1, 2012.  Note:  Although non-covered shares will continue to be calculated using average cost, you are not required to use those numbers.  The gain/loss of non-covered shares will not be reported to the IRS.

For new accounts, complete the Cost Basis Method section on the account application. For existing accounts, complete the Cost Basis Method Election Form. The impact of a Cost Basis Method change on or after the date of the first redemption of covered shares is dependent upon your current Cost Basis Method. If your current method is Average Cost, then a change to another method applies only to shares acquired after the date of the first redemption from your account. For all other methods, a change in method will apply to all remaining covered shares in your account

What cost basis methods do I have available for my fund shares?

Cost Basis Method  

Description

Average Cost

 

A cost basis method using the average cost to calculate the adjusted cost basis for shares, which in turn is used to calculate the gain or loss for the shares sold. All of the purchase costs are added together in an aggregate cost amount. The cost per share can be determined by dividing the aggregate cost amount by the total shares in the account. The basis of the shares redeemed can then be determined by multiplying the shares redeemed by the cost per share. Shares are sold in a first in, first out order within each lot category, depleting non-covered unknown shares first then non-covered known shares and lastly covered shares. To see an example of how to calculate average cost click here

First-in, First-out (FIFO)

 

A cost basis method using the adjusted cost basis to calculate the gain or loss for the shares sold. The depletion order of the covered tax lots are those acquired first or with the oldest age date to be the lot sold first.

Last-in, First-out (LIFO)

 

A cost basis method using the adjusted cost basis to calculate the gain or loss for the shares sold. The depletion order of the covered tax lots are those acquired last or with the newest age date to be the lot sold first.

Highest Cost, All shares (HIFA)

 

A form of the specific ID cost basis method, using the adjusted cost basis to calculate the gain or loss for the shares sold. The depletion order of the covered tax lots as those with the highest adjusted cost basis to be the lots sold first.

Highest Cost, Long-term shares (HIFL)

 

A form of the specific ID cost basis method, using the adjusted cost basis to calculation the gain or loss for the shares sold. The depletion order of the covered tax lots are those held more than one year with the highest cost to be the lots sold first, then the lots held one year or less with the highest cost.

Highest Cost, Short-term shares (HIFS)

 

A form of the specific ID cost basis method, using the adjusted cost basis to calculation the gain or loss for the shares sold. The depletion order of the covered tax lots are those held one year or less with the highest cost to be the lots sold first, then the lots more than one year or less with the highest cost.

Lowest-cost, All shares (LOFA)

 

A form of the specific ID cost basis method, using the adjusted cost basis to calculate the gain or loss for the shares sold. The depletion order of the covered tax lots as those with the lowest adjusted cost basis to be the lots sold first.

Lowest-cost, Long-term shares (LOFL)

 

A form of the specific ID cost basis method, using the adjusted cost basis to calculation the gain or loss for the shares sold. The depletion order of the covered tax lots are those held more than one year with the lowest cost to be the lots sold first, then the lots held one year or less with the lowest cost.

Lowest Cost, Short-term  (LOFS )

 

A form of the specific ID cost basis method, using the adjusted cost basis to calculation the gain or loss for the shares sold. The depletion order of the covered tax lots are those held one year or less with the lowest cost to be the lots sold first, then the lots held more than one year or less with the lowest cost.

When and how will Wasatch report cost-basis information to me? Your existing account(s) which contained a valid average cost figure for non-covered shares were historically eligible to receive an Average Cost Statement which provided basis information to you (but not the IRS). Beginning with the 2012 tax year, all basis information will be reported to you on IRS Form 1099-B. That form will additionally report the designation of shares as either covered or non-covered and whether the holding period of those shares is short-term or long-term. Remember, the IRS does not receive basis information for non-covered shares.

Why do my cost basis records differ from those provided by Wasatch?
Wasatch’s cost basis accounting service only offered average cost for non-covered mutual fund shares.   If you have previously sold shares and used any other cost-basis method, Wasatch records may not match yours.

If I wish to change from Average Cost to another method, can I do that?
You may change your cost basis method.  However, once transactions (purchases or sales) have been executed the cost basis used for those shares cannot be changed by the investor per IRS regulations.  Changes made to an account’s cost basis method will apply prospectively to any future transactions.  So, if no transactions have been made on covered shares, then a change of method would still apply to all shares.

How do I change my Cost Basis Method?
You may submit a Wasatch Cost Basis Election Form (which you may find by clicking here), or you may write a letter of instruction indicating your preference.  Please indicate your election by Fund account. (You may also Call Wasatch Shareholder Services at 800.551.1700 to order forms or obtain more information).

Will changing my cost-basis method affect past sales?
No. Wasatch will not apply your cost-basis method to any past transactions. Changing your cost-basis method will apply only to current and future sales.

Where Do I Report Cost Basis Information?
Cost basis information is a critical component of your federal and state tax return filings. The basis information provided to you on Form 1099-B may be required to complete, at a minimum, IRS Form 8949, IRS 1040 Schedule D, and the IRS 1040 tax return. Please visit the IRS website at www.IRS.gov, the website for the state in which you pay taxes, and contact your tax advisor for more details on where to report the information contained within IRS Form 1099-B.

Is cost-basis information available for all account types?
No. Cost-basis information is not available for the following types of accounts: money market, profit-sharing and money purchase pension plans, Coverdell educational savings, Individual Retirement Accounts (“IRA”s) including Traditional, Roth, SEP and Simple IRA and 403(b) accounts.

What are "wash sales," and does Wasatch track them?
Under current IRS regulations, a wash sale occurs if a shareholder attempts to claim a loss on the sale of an investment if a substantially identical investment is purchased within 30 days before or after the sale.  If this occurs, the loss would be disallowed. For shares covered by the new legislation effective January 1, 2012, Wasatch is only required to track wash sales where both the sale and the purchase resulting in the wash sale are from identical securities occurring in the same account.  Wasatch does not track wash sales across accounts with different registrations; for example, between your individual account and your joint account or between your individual account and your IRA.

How will shares be sold in my account if I have both non-covered and covered shares?
Unless directed otherwise by you, Wasatch will follow the financial industry best practice of depleting non-covered shares with unknown cost basis first, then non-covered shares with known basis, followed by covered shares.

How does Wasatch calculate the default Average Cost Method for shares?
Using the average cost method, all the shares in the account at the time of the sale are averaged to determine the cost.

Date of Purchases Transaction Amount Price Per Share # of Shares Total Shares
2/09/2012 Purchase by check $2,700.00 $9.00 300 300
3/27/2012 Purchase by ACH $4,000.00 $10.00 400 700
12/28/2012 Reinvest Dividend $300.00 $12.00 25 725
  Total Amount Invested $7,000   Total Shares: 725
Date of Sale Transaction Amount Price Per Share # of Shares Total Shares
6/25/2013 Sell $3,000 $10.00 300 425

On June 25, 2013 a sale order was executed for $3,000 at $10.00 per share.  In order to determine the Average Cost of the 300 shares sold we need to consider three important steps. 

First, determine the total cost of shares purchased in the account
Amount of all investments including reinvested dividends:
$2,700 + $4,000 + $300 = $7,000

Second, calculate the average cost of the shares in the account
To determine this calculation take the total amount invested divided by the total share balance:
$7,000/725 = $9.66 per share

Third, calculate the cost basis for the 300 shares sold
From above we determined the average cost per share was $9.66.  Multiply the 300 shares sold x $9.66 to determine to total cost of the shares sold on June 25, 2013:
300 x $9.66 = $2,898.00 (Cost Basis).

In order to calculate the capital gain/loss, simply take the amount sold on June 25, 2013 and deduct cost basis.  If the number is positive it is a capital gain.  If the amount is negative, it is a capital loss:
6/25/2013            Sell: $3,000 - $2,898 (Cost Basis) = $102

In this example the sale proceeds are greater than the cost basis which generated a positive number indicating a capital gain of $102.

How will corporations be treated as it relates to the changes in cost basis reporting?
The regulations require investment firms to report sales and cost basis information for covered shares on accounts held by "S" corporations as defined by the Internal Revenue Code section 1361(a).  Wasatch Funds previously sent a letter and Form W-9 to all corporate account owners and requested they designate their company as either a "C" or an "S" corporation. 
If no response was received, the account was registered as an "S" corporation.  Wasatch will not report sales and cost basis information on "C" corporations.  If your corporation should be designated as a “C” corporation and you did not send in a form, please click here to complete and return the form. 

Where should I send my completed Wasatch Cost Basis Election Form or Letter of Instruction?

Regular Mail: Overnight Delivery:
Wasatch Funds   Wasatch Funds
P.O. Box 2172   803 W. Michigan St., Suite A
Milwaukee, WI 53201-2172   Milwaukee, WI 53233-2301

Whom Do I Contact With Questions?
For more information on how the Cost Basis Method you elect may impact tax reporting on your account, please visit the IRS website at www.IRS.gov or contact your tax advisor. Please contact our Shareholder Services Department at 800-551-1700 7am-7pm M-F for general cost basis and other tax reporting questions.

 

The Frequently Asked Questions (“FAQs”) are meant to be information only.  They should not be construed as Tax Advice. In the event any information contained herein is deemed to be tax advice, it was not intended or written to be used for the purpose of avoiding tax penalties.