Cost Basis and Taxable Amount

Forum|Forum|1 year ago
January 29, 2025
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I have a mutual fund with T. Rowe Price that I started in 1997.Since then I have re-invested all dividends and capital gains. So I assume I have both non- covered and covered shares.

I'm thinking of selling a portion of it and will need to figure the cost basis and taxable amount.

TRP states that when I withdraw money from an account with both covered and non-covered shares, they first use non-covered shares. Furthermore, they said they do not track or provide a cost basis for non-covered shares however on my account page they provide the following:

Shares Cost Basis Cost per Share

Covered Average Cost $23.16

Noncovered 4,972.270 Average Cost $15.70

Current Share Price: $24.32

So, if I wanted to raise $50,000 gross, I would need to sell about 2,056 shares at the current price of $24.32.

If I understand correctly, then the taxable amount would be $50,000 - ($15.70)*2056) = $17,720.80.

Is that correct?

Best answer by DianeW777

Yes, you are exactly correct if you base it on what TRP is providing. However, you are allowed to use an average price for the shares in mutual funds which includes all purchases (covered and noncovered). This applies to mutual funds only.

Also, it's somewhat rare that an investor does select a specific batch of shares to be sold. This simply means the first in, first out (FIFO) method is almost always used. In your case the there's no reason to make any specific selection of funds because the gain or loss is the same regardless of shares sold.

Average Cost
Using the average cost, cost basis is calculated based on the average price paid for all shares held, regardless of holding period. Gains or losses are defined as short-term or long-term based on the assumption that the oldest shares are sold first, even though the average cost is the same for all shares. This method of calculating cost basis is permitted for mutual funds only and cannot be used to calculate cost basis for individual securities such as stocks and bonds. Fidelity uses the average cost method when calculating your cost basis for all mutual fund shares.
- $23.16 + $15.70 = $38.86 per share is your cost. You can use this higher number.

Keep all of your records to show how you arrived at your cost basis and gain.

DianeW777Answer

Average Cost
Using the average cost, cost basis is calculated based on the average price paid for all shares held, regardless of holding period. Gains or losses are defined as short-term or long-term based on the assumption that the oldest shares are sold first, even though the average cost is the same for all shares. This method of calculating cost basis is permitted for mutual funds only and cannot be used to calculate cost basis for individual securities such as stocks and bonds. Fidelity uses the average cost method when calculating your cost basis for all mutual fund shares.
- $23.16 + $15.70 = $38.86 per share is your cost. You can use this higher number.

Keep all of your records to show how you arrived at your cost basis and gain.

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franksmith16Author

Employee

You're summing up the average cost of covered and non-covered to get to what you say I should use as the average cost - $38.86, which is way higher than the current price of $24.32.

Wouldn't it be more like the average of the two - ($23.16 + $15.70) / 2 = $19.43 ?

DianeW777

No, the tax law is clear on the cost basis for mutual funds. They allow the average cost of all mutual funds from purchase to sale date. You are not required to break them down between covered and noncovered. This law has been in effect for many years.

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