What Has Changed?
Cost Basis Reporting rules have changed due to Section 403 of the Energy Improvement and Extension Act of 2008. Effective January 1, 2012, broker-dealers, transfer agents, and custodians are now required to provide cost basis reporting to the IRS as part of Form 1099-B.
Cost basis information for mutual fund shares that were purchased on or after January 1, 2012 and subsequently redeemed are now reported to both the shareholder and the IRS on Form 1099-B. Cost basis information for shares purchased prior to January 1, 2012 will continue to be reported only to eligible shareholders.
Shareholders will be able to request that the fund provide calculations using a method they select. The following cost basis methods will be supported: Average Cost; First In, First Out (FIFO); Last In, First Out (LIFO); or Highest Cost, First Out (HIFO), as well as the ability to choose specific share lots. Guggenheim Investments has selected Average Cost as the default calculation method.
Cost basis method selection must be considered at the time of the sale.
Frequently Asked Questions
Q: Why did Cost Basis Reporting change?
Q: When did the changes to Cost Basis Reporting go into effect?
Q: What types of accounts are affected by the new regulations?
Q: How is the new cost basis information provided?
Q: What are covered shares vs. non-covered shares?
Q: What cost basis reporting methods can I select from?
Q:If I don't select a cost basis calculation method, what happens?
Q: Why did Cost Basis Reporting change?
A: As part of the Energy Improvement and Extension Act of 2008, brokers and mutual fund companies are now required to provide cost basis reporting to the Internal Revenue Service (IRS) and to taxpayers on mutual fund shares that were acquired on or after January 1, 2012 and subsequently redeemed.
Q: When did the changes to Cost Basis Reporting go into effect?
A: Changes went into effect for new shares that were acquired on or after January 1, 2012 and subsequently redeemed. Typically, these are referred to as "covered" shares.
Q: What types of accounts are affected by the new regulations?
A: In general, only accounts that currently receive tax reporting on IRS Form 1099-DIV/B are included, such as Individual, Joint, Trust, UGMA/UTMA, and Partnership accounts. Retirement accounts and most corporate accounts, including all IRAs and 403(b)s are not covered by the regulations. The only newly reportable entity is the S-corporation.
Q: How is the new cost basis information provided?
A: Beginning with the 2012 Form 1099-B, which was delivered in 2013, cost basis information for covered shares is included on the form.
Q: What are covered shares vs. non-covered shares?
A: Covered shares are shares acquired on or after January 1, 2012. Non-covered shares are typically shares acquired before January 1, 2012.
Non-covered shares are generally considered to be shares acquired before January 1, 2012 (the "effective date"). Such shares are “grandfathered”, and mutual fund companies are therefore not required to provide cost basis reporting to the IRS for them. As a result, Guggenheim Investments will not report cost basis information for your non-covered shares to the IRS,but will, if we have in the past, report cost basis information for your non-covered shares to you. For non-covered shares, we will only provide cost basis reporting using the Average Cost method.
Shares acquired on or after the effective date are considered “covered shares” subject to mandatory cost basis reporting. The cost basis reporting information for these covered shares is included on your Form 1099-B (beginning in tax year 2012). We also report cost basis information for your covered shares to both you and the IRS, as required by law.
Consequently, each customer's account will be identified as having two separate pools; older shares acquired before the effective date identified as “non-covered”, and new shares acquired on or after the effective date, identified as “covered”.
Q: What cost basis reporting methods can I select from?
A: The following methods are available as account-level defaults for covered shares:
Average Cost – The costs of all fund shares are added together to obtain an aggregate purchase cost. The average cost per share is then determined by dividing the aggregate purchase cost by the number of fund shares owned. The basis of the redeemed shares is determined by multiplying the number of fund shares sold by average cost per share.
FIFO (First In, First Out) – Shares will be sold in the order they were purchased.
LIFO (Last In, First Out) – Shares will be sold in reverse order from when they were purchased.
HIFO (Highest Cost, First Out) – Shares will be sold according to the cost at which they were purchased. Shares purchased at higher cost will be redeemed before shares purchased at lower cost.
Shareholders may also identify specific shares to be sold at the time of a redemption or exchange redemption. Shareholders using this method (“Specific Share Identification”, or SSI) are expected to provide lot selection information along with their exchange or redemption request. However, shareholders using this method must also select FIFO, LIFO, or HIFO to use as their account-level default. In situations where the shareholder cannot or does not provide SSI instructions (e.g. systematic withdrawals and other non-shareholder-generated activity), the account-level default will be used. Shareholders who wish to specify shares may not use Average Cost as their account-level default because the average will apply to all shares, regardless of which shares a client specifies for sale.
Q: If I don't select a cost basis calculation method, what happens?
A: We will use Average Cost, the default cost basis reporting method, to determine what shares will be sold to satisfy your request, as well as any gain or loss associated with it.