Cost Basis Resource Center

Prior to cost-basis reporting, how did reporting on sales of mutual fund shares work?

When you sell a mutual fund, you generally realize a capital gain or loss. The gain or loss is computed by subtracting the adjusted cost basis from the proceeds of the sale. The adjusted cost basis typically is the amount you paid to purchase fund shares adjusted by certain items, such as a tax return of capital or wash sale. If the proceeds exceed the adjusted cost basis, you recognize a gain. If the adjusted cost basis is more than the proceeds, you will recognize a loss on the sale. Different rules apply to tax-exempt accounts and tax-exempt investors.

Your historical records (e.g., periodic account statements, transaction confirmations, prior year’s 1099s) will be the source of determining the adjusted cost basis and purchase dates. Proceeds from the sale will be reported to you on Form 1099-B by your broker or mutual fund family.

Based on a combination of all this information, you must then compute the gain or loss on the sale and determine the holding period of the shares—long or short term. The holding period will dictate the maximum tax rate applicable to the resulting gain or loss.

As a service to their clients, most mutual fund families, including Lord Abbett, provide shareholders with an average cost-basis statement in conjunction with Form 1099-B. This statement reflects the gain or loss and the holding period for each sale that occurred during the year by using the “single category average cost basis method” approved by the IRS.

The average cost-basis statement is not filed with the IRS, and you do not have an obligation to use it.

How will reporting of mutual fund sales work going forward?

When you sell a security that was purchased after the effective date (January 1, 2011, for stocks, and January 1, 2012, for mutual fund shares), you must select a cost-basis method or instruct the broker or mutual fund family as to which lot of shares to sell by specifically identifying lots. A lot is created each time you purchase additional shares. Dividends reinvested also create a new lot. Lots purchased at different times and prices have a different holding period and cost basis.

The cost-basis method you use for shares acquired after the effective date can be different from the method used for shares acquired before the effective date.

By February 15 of the year following the applicable effective date (January 1, 2011, or January 1, 2012), the broker or mutual fund family will send you a Form 1099-B that will indicate the proceeds, adjusted cost basis, holding period, and other information for each sale.

You are required to use this information when preparing your income tax return; it also will be reported directly to the IRS.

Can shareholders specifically identify shares to sell?

Yes. Regardless of the cost-basis method on your account, you can specifically identify shares you would like to sell by calling the Lord Abbett Service Center. It is important to note that if you specifically identify shares to sell, you will no longer be provided with an average-cost-basis information on noncovered shares for this fund. Therefore, before you sell specific shares, please ensure that you have all the information necessary to compute the cost basis on noncovered shares manually, as we can no longer provide you with this information.

When should a shareholder specifically identify shares to sell?

In addition to the fund’s default method of average cost, you may choose FIFO (first-in, first-out), LIFO (last-in, first-out), LOFO (lowest-in, first-out), HIFO (highest-in, first-out). We believe that most tax lot–selection strategies can be accomplished by using one of these methods. In the rare case your lot-selection strategy cannot be accomplished by using one of these methods, you may specifically identify shares to sell by calling the Lord Abbett Service Center. Please note that if you specifically identify shares to redeem, we will no longer be able to provide you with average-cost-basis information on noncovered shares.

What is mandatory cost-basis reporting?

Mandatory cost-basis reporting shifts to the broker or mutual fund family the burden of computing the holding period of a security, the adjusted cost basis, and resulting gain or loss based on an investor’s selected tax lot relief methodology. As a result, the reporting entity is now responsible for both computing the information and reporting it to the investor and the IRS.

Why did congress pass mandatory cost-basis reporting?

Congress believes that some taxpayers who sell securities are overstating their cost basis (i.e., the amount paid for a security) and, therefore, understating gains on the sale of securities. This understatement results in the underreporting of taxable income and related taxes, and, thus, lower tax revenue for the government.

To ensure greater compliance with existing tax laws and to minimize potential lost tax revenue, Congress passed mandatory costs-basis reporting as part of the Emergency Economic Stabilization Act of 2008.

What is the difference between revoking and changing an average-cost-basis method?

You will be able to revoke the average-cost-basis method no later then your first redemption date. By revoking the average-cost-basis method, the tax basis of each share will revert back to its original basis. All such shares will no longer maintain the same average cost basis per share. After a redemption has occurred using average cost, you may only change to another method going forward (as described above) and can no longer revoke the average-cost-basis method. This means that all shares acquired prior to the change will maintain the same average cost basis per share. Any shares acquired after the change will keep its original cost basis and will not be averaged with prechange shares.

What method will be used on a new account that a shareholder opens?

Generally, when you transfer to a new fund, your personal information, including the cost-basis method, is copied form the "old fund" to the "new fund." To the extent the old fund does not have a cost-basis method assigned, the fund's default of average cost will be assigned to the new fund. You may change the method at any time.

Can a shareholder change the method used on a transaction at a later point in time?

No. In accordance with IRS regulations, once a transaction has settled, you cannot change the method used for that transaction. Because of this, it is important to consider the cost-basis method used at the time of the transaction.

How frequently can a shareholder change their method?

You may change your method as frequently as you like. You are not required to use the same method for every redemption transaction. However, if you have chosen to use average cost or were defaulted to average cost, you may only change to another method either in writing or on our Website. Changes to or from a method that does not include average cost may also be made by telephone.

Can a shareholder elect a method to be used on shares purchased prior to Jan. 1, 2012 ("noncovered shares")

Lord Abbett does not intend to change the approach on reporting noncovered shares. Lord Abbett will continue to supply average cost-basis information on noncovered shares to eligible account holders. Lord Abbett will not supply shareholders with cost-basis information using a method other than average cost on noncovered shares. A shareholder is not required to use the average cost-basis information on noncovered shares, and it will not be reported to the IRS.

When can a shareholder choose a method?

You may choose a method at any point; however, if a method is not chosen by January 1, 2012, the default of average cost will be used. You will be able to revoke the default average-cost method and choose a different method provided you do so before the first redemption date following January 1, 2012. Once you redeem or exchange shares using the average-cost method you can no longer revoke the average cost-basis method; however, you may change to a different method going forward for shares purchased after you make a different election.

Which method is best, and how can a shareholder make an election?

Each shareholder's tax situation may be different; therefore, the "best" method for one shareholder may not be the best for another. A shareholder may want to discuss his personal tax situation with his advisor prior to selecting a method.

If you would like to use a method other than the default average cost method, you may do so online by visiting www.lordabbett.com, by contacting us at 800-821-5129, or by completing a Cost-Basis Method Form.

When does the new act go into effect?

The Act is being implemented in three phases. The first phase relates to equity shares (stocks) purchased on or after January 1, 2011; the second phase affects mutual fund shares purchased on or after January 1, 2012; and other securities are covered on or after January 1, 2013.

Does the act affect a shareholder if he or she hasn’t sold a security?

Anyone who owns a security will be required to inform the broker or mutual fund family through which they hold the securities to be sold as to which tax lots they want to sell no later than the first sale of such securities.

Alternatively, an investor may inform a broker or mutual fund family of their preferred tax lot relief methodology and have that method apply to all future sale transactions. Otherwise investors do not need to take any further action unless they sell a security and are preparing a tax return. Investors will receive from their broker or mutual fund family the computed net proceeds from the sale of the security, the holding period for the security, the adjusted cost basis, and the resulting gain or loss on Form 1099-B and must include that information on their tax return.

What information is needed to compute gains or losses?

The Act does not change how to compute gains or losses; it only changes who (i.e., brokers and mutual fund families—not investors) computes and reports holding period information for the security, adjusted costs basis, and the resulting gain or loss to the IRS. Brokers and mutual fund families also will provide that information to the investor.

What is changing as a result of the stabilization act?

Specific changes resulting from the new mandatory cost-basis reporting law will include:

Brokers and mutual fund families are required to select a default cost-basis method.

Investors will need to identify the specific lots to sell upon redemption, select a cost-basis method that they want to use for their account, or do nothing and use the default method.

Based on the investor’s selection, brokers and mutual fund families will compute and report net proceeds from the sale of a security, the holding period information for the security, and the adjusted cost basis (the amount you paid to purchase fund shares adjusted by certain items, such as a tax return of capital or wash sale), to both the investor and the IRS.

Does a shareholder have to choose a method?

No. All Lord Abbett funds will use the average cost-basis method to compute and report cost basis on sales of shares purchased after January 1, 2012, unless the shareholder (or their broker) provides instructions to use a different method. If the shareholder would like to use the default method of average cost, no action is required. If your preference is to use a method other than average cost, then you must inform us of your preferred cost-basis method.

Why would a fund choose average cost as its default method?

As a service to our shareholders, Lord Abbett has been supplying cost-basis information on shares purchased prior to January 1, 2012, to eligible accounts using the average cost-basis method. In order to maintain consistency, Lord Abbett has chosen average cost as the default method for shares purchased after January 1, 2012.

What is a fund’s default cost-basis method?

A fund's default cost-basis method is average cost.

Which cost-basis methods can a shareholder choose?

Lord Abbett will support six different cost-basis methods. In addition, a shareholder will have the ability to specifically select the shares that she/he wishes to sell instead of using one of the cost-basis methods. Below is a list of all the available methods and a description for each. Numerical examples of each method can be found in Cost-Basis Method Examples

Acquisition-date-ordering methods

Average cost (ACST)—Assigns the average cost to all shares in an account by averaging the cost basis of all acquisitions (including dividend reinvestments) made after January 1, 2012, in the account. Similar to the first-in, first-out method, the oldest shares will be sold first. Once a share has been averaged, its new average cost will replace the original cost basis.

First-in, first-out (FIFO)—Shares acquired first (including dividend reinvestments) after January 1, 2012, in the account are the first shares sold.

Last-in, first-out (LIFO)—Shares acquired last (including dividend reinvestments) after January 1, 2012, in the account are the first shares sold.

Cost-per-share-based methods

High cost (HIFO)—Shares with the highest cost per share (including dividend reinvestments) acquired after January 1, 2012, are the first shares sold. This method will minimize the overall gain and maximize the overall loss.

Low cost (LOFO)—Shares with the lowest cost per share (including dividend reinvestments) acquired after January 1, 2012, are the first shares sold. This method will maximize the overall gain and minimize the overall loss.

Hybrid cost-per-share and acquisition-date-ordering method

Read Cost-Basis Method Examples to understand how each method impacts the resulting gain or loss.

What is a tax lot?

A tax lot is created whenever additional shares of a fund are purchased. Dividends reinvested are also considered purchases and, therefore, create a new tax lot. For example, if you purchased a mutual fund and elected to reinvest monthly dividends, you will have 25 tax lots after two years (the original purchase plus 24 dividend reinvestments). Each of these tax lots were purchased on different dates and at prices that may also be different.

How does the cost-basis method impact a shareholder’s tax liability?

As described in the previous question, tax lots will have different purchase dates and prices. The order in which these lots are to be sold is based upon the cost-basis method used. Different methods may produce a different order of shares to be sold. Because lots have different purchase prices and dates the gain or loss and associated holding period (long or short term) may be different depending on the cost-basis method used.

Why is the holding period important?

The maximum federal income tax rate on securities sold that were held longer than one year (long-term gain) generally is lower than the maximum federal income tax rate on securities held for one year or less (short-term gain). For example, if a shareholder purchased 100 shares at $10.00 per share on January 31, 2012, and another 100 shares for the same price, $10.00 per share, on June 31, 2012, both tax lots have the same cost basis ($10.00 per share), but different purchase dates. If this shareholder sells 100 shares on March 15, 2013, for $12.00 per share, his tax liability will vary depending on the lot that was sold. Assuming the January 31, 2012, lot was sold, the resulting long-term gain would be $200.00 (100 shares multiplied by the difference is the sale price of $12.00 per share and the cost basis of $10.00 per share). Assuming a long-term capital gain rate of 15%, the shareholder's liability is $30 if the first lot is sold. If instead the second lot is sold, the gain will still be $200, because both lots were purchased at the same price; however, the gain will be considered short term. Assuming a short-term capital gain tax rate of 35%, the shareholder's tax liability will be $70. In this scenario, choosing the first lot would produce a smaller tax liability.

What is a cost-basis method?

A cost-basis method is a systematic approach for ordering shares to be sold that were purchased at different times and at different prices. The order of the shares is used to determine which shares are sold first.

Why is the purchase price important?

The cost basis of a tax lot is determined by its purchase price adjusted by various tax items, including wash sales and returns of capital. To the extent a shareholder holds multiple lots with a different cost basis, each lot will produce a different gain or loss.

Will reporting to the IRS Change?

No. You have always been, and continue to be, responsible for reporting cost basis to the IRS. What's changed is that we are now required to report cost basis to you and the IRS on covered shares. The reporting on noncovered shares has not changed.

Which cost-basis adjustments is a shareholder required to make?

We will only adjust the basis of shares held in an account due to activity that occurs within the same account (covered and noncovered shares are considered separate accounts). A shareholder is required to consider all potential adjustments, including across accounts, when reporting to the IRS. Some examples of potential adjustments you may need to make are listed below:

Wash sales—If you sell a fund at a loss and repurchase the same fund within 30 days before or after the sale date (61-day window), all or a portion of the loss may be disallowed due to the wash sale rules. The cost basis and holding period of the shares that were purchased, and thus triggered the wash sale, need to be adjusted. To the extent that this wash sale occurred due to covered shares sold and bought back within the same account, we will adjust and track the new basis. However, if the transaction occurred across two accounts (i.e., sale in one account and purchase in a separate account), then we cannot adjust the basis.

Load-basis deferral—If you purchase shares with a sales charge and then transfer to another fund without paying a sales charge (due to reinvestment privileges) before the 91st day after purchase, any gain or loss generated by the transfer should be adjusted by the sales charge waived. The basis of the new fund should also be adjusted by the waived sales charge.

Six-month loss—If you sell a fund at a loss after holding it for six months or less and received a long-term capital gain distribution, the short-term capital losses generated by the sale should be treated as long-term losses to the extent of long-term capital gain dividends received.

Which shares are sold first in a bifurcated account?

Noncovered shares will always be redeemed before covered shares. The cost-basis method on your account will only be used on covered shares after all noncovered shares are completely sold.

What if the shareholder doesn’t agree with the information on covered shares reported to them and the IRS on Form 1099-B?

It is ultimately the shareholder's responsibility to report the correct cost basis to the IRS. The new IRS Form 8949 provides you with an opportunity to adjust the cost basis reported on Form 1099-B. In addition to the numerical adjustment, you must also provide a reason for the adjustment based upon the standard reasons supplied by the IRS. For more information, please refer to the instructions for Schedule D.

What year-end tax reporting will a shareholder receive if he or she owns both covered and noncovered shares?

Shareholders who own covered (shares purchased after January 1, 2012) and noncovered shares (generally shares purchased prior to January 1, 2012) of a fund will be consid­ered as owning a bifurcated (split) account. This means that for tax reporting purposes only, the shareholder’s investment in the fund will be split and grouped into covered and noncovered shares. Each group of shares will be treated as a separate account (for tax reporting purposes only), and the tax reporting will differ as described below:

Noncovered shares—We are required to report only the proceeds of a redemption to the IRS and shareholders on Form 1099-B. In addition, as a service to our sharehold­ers, we will continue to provide them (but not the IRS) with average cost basis information in order to assist shareholders with reporting the cost basis on noncovered shares to the IRS. Shareholders are not required to use this information.

Covered shares—We are required to report the cost basis to you and the IRS on Form 1099-B. The cost basis will be computed based upon the fund’s default method of average cost, or another method of your choosing. You are required to use this information to report cost basis to the IRS.

If a shareholder owns an account that has both covered and noncovered shares, and intends to continue using the average cost-method, what will change?

As described above, there will be no change in the information we report to the IRS on noncovered shares. However, the cost basis information will now be reported on Form 1099-B instead of the average- cost-basis statement. In addition, because the fund will be considered bifurcated (contains both covered and noncovered shares), we will compute two, average-cost-basis per share amounts—one for covered shares and the other for noncovered shares.

Can a shareholder use a method other than average cost on noncovered shares?

Yes. However, we can only provide cost-basis information on noncovered shares using the average-cost method. You are not required to use the cost-basis information provided on non-covered shares and may compute your cost basis using any other IRS-approved method. Please note that if you intend to compute the cost basis manually, you should maintain detailed records of all transactions in addition to your calculation. Also, if you redeemed/exchanged out of a fund in the past using the average-cost-basis method, you may be restricted by the IRS in changing to another method.