Mutual Funds Basis

[Corduroy Frog]

Real world question - I'm sure most of us have run into this at some time or another.

Dividends from Mutual Funds are usually re-invested - meaning the dividends are taxed when declared, but are immediately used to buy more stock shares in the mutual fund.  Since dividends of $50.00 (for example) are taxable, then the taxpayer basis in the mutual funds increases by $50 because he (she) did not receive them.

The effect of this on the market value may increase $50 as well, or it may increase only $10, or may increase $75.  The cumulative effect on the market value may be a little more than basis, or a little less than basis.

Situation:   John H sells his entire holdings in "Wonderful Value Mutual Fund" for $15,000 in 2022.  Not only that, but he comes to you as a new customer to file his return.  He doesn't have a clue what his basis may be and has no history to research.  What do you do??

• Refuse to file because he cannot substantiate his basis.
• Assume his basis is equal to the sales value, and report zero capital gains.
• Delay filing until you can research the dividend history and original investment plus any subsequent investments.
• Contact the mutual fund company for his records, and hope that they have them.

Any other possibilities?  Interested to know what others will do because I am confronted by this from time to time.

 

 

[BulldogTom]

Assuming the mutual fund is not covered because it was purchased before the brokerage holding the fund was required to track and report on the 1099B - I have the client get the records from the mutual fund company.   If they can't (won't)  then I get the client to tell me the date they think they made the first purchase, look up the price on that date and use it as basis.   Client loses some basis, but that is the cost of bad record keeping.

However, when it comes to mutual funds, I have never run into this issue.   It is always with inherited stock that I have this problem.

Tom
Longview, TX

[Gail in Virginia]

If you can't come up with any records at all regarding basis, then basis is -0-.  

[mcbreck]

It depends upon the fund company and whether they used an adviser. If it was held at the fund company, they have the cost basis 99% of the time. The client needs to ask. If it's with an adviser, usually they will generate a letter with what their records say (if the adviser can't figure it out, the adviser stinks). Explain to the clients what you need, why you need it and they will almost always come up with a basis. As an adviser we occasionally have a mutual fund which doesn't have a cost basis like this, we'll get a list of all distributions (they are on the internet) and come up with a basis as best as can be determined. With mutual funds it's rare to not have at least 80% of the sale price as actual cost. Stocks (as mentioned) are a very different story. Occasionally you'll get someone with ATT stock or whatever and you have to come up with a cost basis that is a true nightmare situation. Spinoffs are horrific and you can have real difficulty figuring that out.

[JohnH]

I would do some cursory research to find out if JohnH had access to any piece of paperwork that might get us started on a basis reconstruction. It might take some effort on his part, but that’s on him. If he came up with something then I’d try to do a basis reconstruction if there were sufficient info. I’d also make it clear to the lazy bum that it’s going to cost him a lot for the research. 
 

 If there’s absolutely nothing he can obtain then I’d tell him we’re going to have to go with a cost basis of -0-, which might cost him a lot of tax, especially  if he actually had a loss due to reinvested CG and dividends.   

Either way, he’s going to pay. But he can afford it - he has an extra $15k (unless he’s already blown it on a boat, motorcycle, cruise, etc) 

[Catherine]

Basis re-creation, as best you can, and any estimation on the low side. Document what you do & any assumptions made. Weirdest one I had was an elderly man who had been investing in a mutual fund through payroll deduction, for years. He knew it was $5/week, started about when his son (older than I am!) started kindergarten. How long? Well, he left that job, and we figured out how many years at $5/week. I documented everything. It was still a pittance compared to the total sale, but it saved him some tax, he felt better about the whole thing, and I had copious notes to back up the assumptions made. 

Charge for the time. (I didn't, but then my client was in his mid-90's and it was worth it to hear the tales of his work and his son's scout troop shenanigans and the rest.)

[Sara EA]

When all else fails, I have looked up the lowest price a fund or stock ever traded for in its history.  The taxpayer can't have purchased it for less than that amount.

[Corduroy Frog]

Thanks to all who have posted.  The group has given me more options than I realized were available.

Actually, I believe the year was 2011 when stockbrokers and custodians were forced to disclose basis on their 1099-B information returns.  I would trust any basis for mutual funds held less than 12 years, but a majority have held much longer.  But time is on our side - one day almost all funds will be held 2011 and later.

[JohnH]

13 minutes ago, Corduroy Frog said:

Thanks to all who have posted.  The group has given me more options than I realized were available.

Actually, I believe the year was 2011 when stockbrokers and custodians were forced to disclose basis on their 1099-B information returns.  I would trust any basis for mutual funds held less than 12 years, but a majority have held much longer.  But time is on our side - one day almost all funds will be held 2011 and later.

And eventually everything purchased before 2011 will be inherited (with basis step-up).  So there's that....

[Catherine]

I have a client who still holds some stock gifted to him by his grandmother, who bought it in the 1930's. He still has her basis.... on a long enough time scale (with mergers, acquisitions, stock splits, and more), the per-share basis approaches, but never quite reaches, zero.

[mcb39]

I can remember years ago keeping copies of all purchases, transactions, splits, etc and then spending hours adding back dividends.  It was a great learning experience but there were way fewer clients of mine who had investments at that time.  For whatever reason, I have never disposed of those transactions and they might be welcome in some IRS museum at some given time.  We never had it easy in the early days and we don't have it easy now.

[Catherine]

On 10/25/2023 at 4:04 PM, mcb39 said:

I have never disposed of those transactions

On a similar theme, my mother-in-law (deceased for quite a few years now) kept copies of all her tax returns. I have two framed (in one frame) hanging in my home office, from 1942 & 1943. With the Victory Bond coupons attached! Yes, her full ssn is on the returns, but that ssn was locked nearly a decade ago.