The general rule for the reporting of gains on the sale of shares is using the first in ? first out method, meaning the first shares you purchase are assumed to be the first shares you sell. For mutual funds only, there is an alternative method that uses the average cost of the shares purchased. The election to use the average cost method is particular to a specific mutual fund; it can be made at any time and once made must be used for all future sales in that fund. Mutual fund companies typically provide average cost basis reports on sales during the year and do not provide first in ? first out basis on those shares.
The election to use average cost should be considered in either of the following three circumstances
When the amount of the gain is not expected to be dramatically different under either the first in ? first out or the average cost method and the cost to computing the first in - first out basis is significant.
When the mutual fund value has not changed substantially over the holding period.
When the mutual fund company has provided you with the average cost basis and computing the cost basis under the first in method cannot easily be calculated.
Please call us if you have any questions about this election.
Morre & Company, LLP
Certified Public Accountants
1682 Novato Blvd, Suite 300
Novato, CA 94947 Phone: (415) 382-5600