When selling mutual fund shares, it is important to keep close track of all of your funds and how many shares you've sold. Investors typically purchase shares for different amounts and in different years, so it can be tricky knowing which shares are actually being sold and nearly impossible to identify specific shares in a group. One of the most common ways of dealing with this situation is to use the average value of your shares as the reporting basis for tax purposes.
1. Verify that you qualify to use the average value reporting method. To be eligible, the Internal revenue Service advises that the shares must have been acquired at different times and various prices. You must have left the shares in an account that is handled by a broker or other custodian. The custodian must also maintain an account for acquiring or redeeming the shares.
2. Total the cost of all the shares you own of the mutual fund. Include all shares from all prior years.
3. Divide the total value of your shares by the number of shares you have. This gives you the average value of each share.
4. Multiply the average value of each share by the number of shares you sold that year. The resulting number is the average value of the shares you sold, and you must report this amount to the IRS when you file your taxes for the year.
5. Report the sales of your mutual fund shares to the IRS on Form 8949. Fill out all spaces on the form and submit it as required.
6. Claim losses or report income from capital gains on Schedule D. The amount on this form is transferred to the appropriate line on your Form 1040 tax return to report your profit or loss.
- Your financial institution should provide you with an annual report with the details you need to report the sale of mutual fund shares during the year. If you hold shares in more than one account, be sure to collect all of your account statements before filing your taxes.
- The method of totaling all your shares regardless of whether you held them short-term or long-term is called the “Single-category Method.” As of early 2012, this is the only averaging method the IRS allows. The “Double-category Method” is no longer accepted for averaging shares. Check with a tax professional if you think you should be using the double-category method to report the sale of funds to determine if you qualify for an exception.
- Incorrectly reporting the sale of mutual fund shares can result in additional tax liabilities and penalties.
Items you will need
- Transaction details on mutual fund acquisitions and sales
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