Regarding FIFO vs. Avg. Cost Basis on Funds

iras1 on

There is no such IRS rule. FIFO is the default. You may have things backwards. If you switch to average cost basis, you must continue to use average cost basis for all holdings of that security. There is no tax code requirement that every holding in an account be treated the same way with regard to cost basis calculations.

Ira Smilovitz

In a message dated 2/7/2012 11:03:47 A.M. Eastern Standard Time, lindalee0@yahoo.com writes:

Speaking of individual accounts, I read on the fidelity agreement that when you switch to FIFO that you have to switch over for all your accounts. I am not sure whether this is so for accounts at the same brokerage or whether this applies to accounts at all brokerages. I did confirm that accounts registered jointly are treated separate from individual accounts when it comes to using the same basis accounting, but I am not sure for individual, whether it applies to all accounts anywhere or just at the same brokerage house. I am waiting patiently for an answer from the IRS.

Laurie Frederiksen on

On Tue, Feb 7, 2012 at 12:34 PM, wrote:

There is no such IRS rule. FIFO is the default. You may have things backwards. If you switch to average cost basis, you must continue to use average cost basis for all holdings of that security. There is no tax code requirement that every holding in an account be treated the same way with regard to cost basis calculations.

Just to clarify this, it will be a little more complicated now and I don't want you to misunderstand what Ira was saying. It is important to understand if your club owns mutual funds. The IRS does allow brokers to set average cost basis as the default for your mutual funds. Most are doing this. This means that is how you will need to report your gains and losses, unless you specifically tell them to change it prior to the settlement date of the sale.

You will also be able to switch methods going forward, just by notifying your broker prior to a sale. That is new.

Your bivio record keeping has always used First In First Out. To keep your records consistent, and your record keeping easy, we highly recommend you tell your broker that you want to use First In First Out as their default also. You just have to go to their website to do this.

It is important to understand that this is a something you need to do this year that you haven't had to do in the past. Before, it didn't matter what they were using because it was not reported to the IRS. As long as you followed the rules you were OK.

Starting with mutual funds you purchase in 2012, they will be reporting and you will have to match their reports. From what I have seen, this is also going to apply to ETF's. So make sure and check now and set their default cost basis method to FIFO also.

--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio

Mail