I am having a fit with what seems like it must be a common tax scenario – how do I figure out cost basis / capital gains for a mutual fund when I have no records?
Every resource I find seems to assume you will have all the records handy and know exactly what was paid on what date for every share, but I can only guess at either.
In my case:
My wife had a trust fund created sometime in the early 80s, all the money has been in CFSAX, dividends reinvested.
This year she sold $35,000 of shares when we did some home renovations.
We don’t know how much money was originally put into the fund or what date that was. Columbia won’t give us cost basis info for a fund established before 1988.
How is this sort of situation usually handled? Do I make a best guess based on historical market values?
Thanks!
ETA: From what I can tell, most of the shares were bought at a higher price than the current value. Would this mean we realized a loss when selling?
Were the funds purchased with money put into the trust fund? If so, you’d need the purchase date, and you can find the traded value of the fund at the date of purchase.
Or were the stocks themselves transferred into the fund as a gift/transfer? IF so, you’d need to know the prior owner’s basis as well as the FMV at the time of the transfer. Fortunately, a large transfer like this should have a 706 gift tax return from the person who did the transfer, and you might be able to find the value by asking them.
If the stock were transferred from the estate of a decedent (a common reason to set up trust funds), then the value is whatever the mutual fund had on the date of death. (or six months later if the estate chose alternate valuation).
Not exactly what you were hoping for, I’m sure. BUT if you have a date, then you can use something like Google Finance to look up the value at that date. If the records don’t go back that far, you’ll want to call the fund’s management for the FMV at that date.
That gives you the starting value. If there were no dividend reinvestments, then you’re set. If there were, you’ll need the date and FMV of each dividend. Again, this should be available either from a tool like Google Finance or from the management of the company.
And, yes, if you sold for less than you paid, there is a loss. However, I would be surprised if anything 22 years old had a net loss. If it really performed that badly, I’d call a lawyer.
Honestly I don’t know about when the mutual fund shares were bought. My wife thinks they were mostly when she was an infant, so it is possible they were transferred from a different fund since that would predate the inception of the CFSAX fund.
From what I can tell, this fund pays very small dividends quarterly, which were reinvested immediately. This is over a timespan of 25+ years, so trying to list all the purchases and find values would be tough.
As for the loss over that time period, the price per share is less now than it was in 1984-1987. We accumulated more shares than we started with due to the reinvestment, however.
Who managed the trust in all these years? They should have records for at least the time they handled it (if not, they’ve really screwed up).
Try checking around the IRS website and see if they have any guidance regarding making your best guess as to the original value. This can’t be all that unusual a situation.
Don’t worry about the reinvestment dates. You can put “various” in that block on the tax form (I do this all the time, and tax preparers don’t have a problem with it). You will need to try to estimate how much was put into the fund originally and approximate the year. The main goal here is to make an honest attempt to pay capital gains taxes. That way, if the government has a quarrel with what you’ve done, you’ll merely have to pay a penalty, but you will have avoided any hint of tax fraud.
You’ll still need to come up with a figure for reinvested dividends if you’ve been receiving them as income - have you been getting 1099s every year with that dividend income? All of those accumulated dividends are then part of your cost basis. You don’t want to pay tax on them again. As noted, you can report “various” for the dates on the tax form. To be correct, if you’ve gotten distributions within a year of the sales date, those are short term gain. If you wish to take account of that, split the sale in two, and declare those reinvested shares as short term. It will be such a piddling amount compared to the overall sale, that you might not wish to bother.
Taking that into account, and considering the nature of that fund (income generation through treasuries), you are likely to have a loss, or a very small gain.
I also seem to recall that the IRS allows some sort of straight line estimate for reinvested dividends, but I don’t know the details.
I MIGHT be tempted do this, but it’s definitely advice that you take at your own risk, and not the “proper” thing to do:
Take a stab at estimating the least amount of money that could have been paid for the original shares, by using the lowest price during the interval they could have been purchased in, and making a guess as to the number of shares in the original purchase.
Start adding up values of distributions for recent history that you can obtain records for, and tacking them on to the original price. If you exceed the amount you got at sale, stop, and don’t bother even reporting it. If called on it, you can justify that it’s obviously a loss, and you are foregoing any advantage you would have of writing off that loss against any other gains, because you can’t accurately calculate it.
The IRS doesn’t formally support any method of estimating basis or reinvested dividends, but a lot of us tax preparers use it anyway. When the numbers are simply not there, you have to do the best you can.
The IRS and the courts generally will accept reasonable estimates, but there’s always danger - what constitutes “reasonable” is a matter of opinion and court cases come out all the time that contradict what people thought was reasonable just before.
However, I’ve never yet had to use estimates for stock values. This is partly luck (no missing basis for any stock given as a gift to my clients, for example) and partly the incredible amount of data now available on the web. What I can’t find on the web, I’ve managed to get through investment advisors I do referral business with or by contacting fund managers directly.
It’s also probably true that if the records truly are unavailable, then the IRS won’t be able to find them either, which means that they can’t prove that the correct numbers are materially different from your estimate.
Have you called the IRS and asked what practice you should follow?
I have. They’ll tell you to find the basis. They’ll also offer to refer you to the legal department, which involves another hour on hold and someone at a higher pay grade telling you to find the basis.
I made a best guess at the cost basis from the historical market values, erring on the low side.
I E-filed, so we’ll see how it goes. If they decide to audit me, I feel confident that I have made a good faith effort to determine an accurate cost basis. I suspect if they get the actual numbers somehow, I would show less capital gain than what I reported. I’ll report back to the thread if that happens.
Regrettably, the burden is on the taxpayer to substantiate whatever basis he or she claims. If you can’t substantiate the basis, the IRS will use $0 as your basis.
