You can figure your gain or loss using an average basis only if you acquired the shares at various times and prices, and you left the shares on deposit in an account handled by a custodian or agent who acquires or redeems those shares.

To figure average basis, you can use one of the following methods.

  • Single-category method.
  • Double-category method.

 

Once you elect to use an average basis, you must continue to use it for all accounts in the same fund. (You must also continue to use the same method.) However, you may use the cost basis (or a different method of figuring the average basis) for shares in other funds, even those within the same family of funds.

Example.

You own two accounts that hold shares of the income fund issued by Company A. You also own 100 shares of the growth fund issued by Company A. If you elect to use average basis for the first account of the income fund, you must use average basis for the second account. However, you may use cost basis for the growth fund.

You may be able to find the average basis of your shares from information provided by the fund.

 

 

Single-category method.   Under the single-category method, you find the average basis of all shares owned at the time of each disposition, regardless of how long you owned them. Include shares acquired with reinvested dividends or capital gain distributions. 

  Table 3 illustrates the use of the single-category method to figure the average basis of shares sold, compared with the use of the FIFO method to figure cost basis.

  Even though you include all unsold shares of a fund in a single category to compute average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first. 

Example.

You bought 400 shares in the LJO Mutual Fund: 200 shares on May 15, 2008, and 200 shares on May 14, 2009. On November 10, 2009, you sold 300 shares. The basis of all 300 shares sold is the same, but you held 200 shares for more than 1 year, so your gain or loss on those shares is long term. You held 100 shares for 1 year or less, so your gain or loss on those shares is short term.

   How to figure the basis of shares sold. To figure the basis of shares you sell, use the steps in the following worksheet.

1) Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $
2) Enter the total number of shares you owned in the fund just before the sale  
3) Divide the amount on line 1 by the amount on line 2. This is your average basis per share $
4) Enter the number of shares you sold  
5) Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold $

 

Example 1.

You bought 300 shares in the LJP Mutual Fund: 100 shares in 2006 for $1,000 ($10 per share); 100 shares in 2007 for $1,200 ($12 per share); and 100 shares in 2008 for $2,600 ($26 per share). Thus, the total cost of your shares was $4,800 ($1,000 + $1,200 + $2,600). On May 11, 2009, you sold 150 shares. The basis of the shares you sold is $2,400 ($16 per share), figured as follows.

1) Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $4,800
2) Enter the total number of shares you owned in the fund just before the sale 300
3) Divide the amount on line 1 by the amount on line 2. This is your average basis per share $16
4) Enter the number of shares you sold 150
5) Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold $2,400

 

Remaining shares.   The average basis of the shares you still hold after a sale of some of your shares is the same as the average basis of the shares sold. The next time you make a sale, your average basis will still be the same, unless you have acquired additional shares (or have made a subsequent adjustment to basis). 

Example 2.

The facts are the same as in Example 1, except that you sold an additional 50 shares on December 17, 2009. You do not need to recompute the average basis of the 150 shares you owned at that time because you acquired or sold no shares, and had no other adjustments to basis, since the last sale. Your basis is the $16 per share figured earlier.

Example 3.

The facts are the same as in Example 1, except that you bought an additional 150 shares at $14 a share on September 17, 2009, and then sold 50 shares on December 18, 2009. The total adjusted basis of all the shares you owned just before the sale is $4,500, figured as follows.

1) Basis of remaining shares ($16 x 150) $2,400
2) Cost of shares acquired 9/17/09 ($14 x 150) $2,100
3) Total adjusted basis of all shares owned ($2,400 + $2,100) $4,500
     

The basis of the shares sold is $750 ($15 a share), figured as follows.

1) Enter the total adjusted basis of all the shares you owned in the fund just before the sale. (If you made an earlier sale of shares in this fund, add the adjusted basis of any shares you still owned after the last sale and the adjusted basis of any shares you acquired after that sale.) $4,500
2) Enter the total number of shares you owned in the fund just before the sale 300
3) Divide the amount on line 1 by the amount on line 2. This is your average basis per share $15
4) Enter the number of shares you sold 50
5) Multiply the amount on line 3 by the amount on line 4. This is the basis of the shares you sold $750

 

Double-category method.   In the double-category method, all shares in an account at the time of each disposition are divided into two categories: short term and long term. Shares held 1 year or less are short term. Shares held longer than 1 year are long term. 

  The basis of each share in a category is the average basis for that category. This is the total remaining basis of all shares in that category at the time of disposition divided by the total shares in the category at that time. To use this method, you specify, to the custodian or agent handling your account, from which category the shares are to be sold or transferred. The custodian or agent must confirm in writing your specification. If you do not specify or receive confirmation, you must first charge the shares sold against the long-term category and then charge any remaining shares sold against the short-term category.