What you need to know about changes to cost basis reporting.
What Changed?
Beginning in 2012 mutual fund companies will be required to report cost basis information on taxable accounts to investors and to the IRS on the sale or exchange of fund shares acquired on or after January 1, 2012 – called “covered” shares.
Historically, Madison Funds has used the Average Cost method to report cost basis to you and we will continue to use that method to report basis information to you for “noncovered” shares in the future.
For covered shares, Madison Funds has selected Average Cost as its default method for reporting cost basis to you and the IRS. If you would like to use Average Cost for your covered shares, no action is required on your part. Your account will default to that option unless you select another method.
What is Cost Basis?
Cost basis is defined as the cost of the fund shares you purchased, including reinvested dividends and capital gains distributions. When you sell shares in a taxable account, the cost basis accounting method you choose determines how the shares in your account are depleted upon redemption or exchange and how your gain or loss is calculated on the redemption or exchange.
What are Covered Verses Noncovered Shares?
Covered shares are shares acquired on or after January 1, 2012. Cost basis for any sales or exchanges of covered shares will be reported to you and the IRS.
Non-covered shares are shares acquired before January 1, 2012, and any shares for which cost basis is unknown. Because they are not covered by the new rules, we are not required to report cost basis to the IRS for these shares.
What Cost Basis Methods are Available?
We provide several IRS-approved methods for calculating your cost basis on covered shares — each with different tax implications. Please consult your tax professional to determine which method best suits your specific tax situation.
- Average Cost (FUND’S DEFAULT METHOD) – Determined by dividing the total cost of the shares owned at the time of the sale or exchange by the total number of shares owned to produce an average cost per share. Shares acquired first are sold first to determine your holding period.
This is the method we have used to report cost basis to you in the past and we will continue to use that method to report basis information to you for noncovered shares, unless you select Specific Lot Identification.
If you would like to use Average Cost for your covered shares, no action is required on your part.
Note: Average cost will be calculated separately for your covered and noncovered shares. - First In, First Out (FIFO) – Shares acquired first are sold first.
- Last In, First Out (LIFO) – Shares acquired last are sold first.
- High Cost, First Out (HIFO) – Shares with the highest purchase price are sold first.
- Low Cost, First Out (LOFO) – Shares with the lowest purchase price are sold first.
- Loss/Gain Utilization (LGUT) – Current IRS regulations designate shares held for one year or less as short-term while shares held for longer than one year are deemed long-term. The method generally depletes shares with losses first (short-term, then long-term) and gains last (long-term, then short term)
- Specific Lot Identification – you must specify the shares lots to be sold at the time of redemption. The original purchase dates and prices of the shares you choose will determine your cost basis and holding period.
Your selection of a cost basis method could result in shares being sold incurring redemption fees or Contingent Deferred Sales Charges (CDSC). You should carefully consider all available cost basis methods for shares purchased with redemption fees or CDSC prior to redemption.
How do I Elect a Cost Basis Method for My Account?
If you would like to use Average Cost for your covered shares, you do not need to do anything.
If you would like to select a method other than Average Cost for your covered shares, you can make your selection online, complete the Cost Basis Method Election Form, or contact your financial advisor.
Note: A change to your cost basis method, regardless of whether you make an initial election or your account is placed into the Fund default method, applies to all covered shares up until the date of the first redemption from your account, while a cost basis method change on or after the date of the first redemption from your account applies only to future redemptions.
How is Basis Information Reported for My Account?
Existing accounts containing a valid average cost figure have typically received average cost, gain/loss and holding period (short-term or long-term) information along with your IRS Form 1099-B which reports redemption or exchange information. Beginning with the 2012 tax year, the forms will additionally report the designation of shares as either covered or non-covered. Remember, the IRS will not receive the basis information for noncovered shares.
Where do I Report Cost Basis Information?
Cost basis information is a critical component of your federal and state tax return filings. The basis information provided to you on Form 1099-B may be required to complete, at a minimum, IRS Form 8949, IRS 1040 Schedule D, and the IRS 1040 tax return. Please visit the IRS website at www.IRS.gov, the website for the state in which you pay taxes, or contact your tax professional for more details on where to report the information contained within IRS Form 1099-B.
More Information
For more information regarding how the Cost Basis Method you elect may impact tax reporting on your account, please visit the IRS website at www.IRS.gov or contact your tax professional or financial advisor. Please contact Shareholder Services at 1-800-877-6089 for general cost basis and other tax reporting questions.