##### Adjust the cost basis question

 Accounting Tutor: None Selected Time limit: 1 Day

How do you adjust the cost basis when you can't claim a loss?

Nov 22nd, 2015

Thank you for the opportunity to help you with your question!

The Internal Revenue Service (IRS) requires transfer agents, such as Prudential Mutual Fund Services LLC (PMFS), to report a shareholder's adjusted cost basis and gross proceeds for mutual fund shares acquired on or after January 1, 2012, that are redeemed in non-retirement accounts. The regulations also require PMFS to report whether a gain or loss is short-term (held one year or less) or long-term (held more than one year) for all purchases made on or after January 1, 2012 that are subsequently redeemed. Note: The cost basis regulations do not affect retirement accounts, money market accounts, and shares acquired before January 1, 2012.

To help you understand the cost basis regulations, we have prepared the following list of "Frequently Asked Questions about Cost Basis ."

1.  What is cost basis?
Cost basis is the original value of an asset for tax purposes (usually the gross purchase amount), adjusted for stock splits, reinvested dividends, and return of capital distributions. This value is used to determine the capital gain (or loss), which is the difference between the asset's cost basis and the gross proceeds when the asset is sold or exchanged.

2.  Which cost basis methods does PMFS offer and how is capital gain (loss) calculated under each method?
PMFS supports 10 cost basis methods, providing you with ample choices and flexibility to determine the method that best meets your needs. The following examples illustrate how cost basis and capital gain (loss) is calculated under each method. There is also a summary chart showing the results from all 10 calculations at the end of the last method.

1. Average Cost - Under this method, we use the average basis of all shares owned at the time of redemption, regardless of how long you owned them, to arrive at the average cost. To determine the holding period, the shares sold are considered to be those acquired first. Determination of the holding period is important for designating whether a gain is long-term or short-term. For illustration purposes only, a shareholder makes these transactions in a hypothetical mutual fund:

1/5/2013- Purchase 100 shares at \$13 per share for a total cost of \$1,300.
2/1/2013- Purchase 100 shares at \$12 per share for a total cost of \$1,200.
5/8/2013- Purchase 100 shares at \$11 per share for a total cost of \$1,100.
3/4/2014- Purchase 100 shares at \$11.50 per share for a total cost of \$1,150.
4/15/2014- Purchase 100 shares at \$10 per share for a total cost of \$1,000.
6/19/2014- Shareholder redeems 100 shares at \$12 per share for gross proceeds of \$1,200.

With the Average Cost Method, the total investments are \$5,750 and the total shares purchased are 500, which results in an average cost of \$11.50 per share. For the redemption of 100 shares, the cost basis is \$1,150 (100 X \$11.50), subtracted from the gross proceeds of \$1,200, results in a long-term capital gain of \$50
Please let me know if you need any clarification. I'm always happy to answer your questions.
Nov 22nd, 2015

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Nov 22nd, 2015
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Nov 22nd, 2015
Dec 4th, 2016
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