Cost basis is the cost of the shares you purchased, including reinvested dividends and capital gains distributions. The cost is adjusted for any applicable sales charges or transaction fees.

When you sell shares in a taxable account, the cost basis accounting method you choose helps determine how your gain or loss is calculated.

The new regulation treats the sale of mutual fund shares (both redemptions and exchanges) differently, depending on their purchase date. The IRS classifies shares as noncovered or covered.

Noncovered Shares purchased or reinvested before 2012.1		For noncovered shares, the reporting process remains the same. Just as prior to the regulation change: We are required to report sales of mutual funds to the IRS. You are responsible for reporting all gains or losses on the sale of your shares. As a service, we continue to provide average cost information on sales of noncovered shares on eligible accounts.2 You are not required to use the cost basis information we provide. You or your tax advisor may use an alternative method.
Covered Shares purchased or reinvested in 2012 and beyond.		For covered shares, additional cost basis information is reported to the IRS and is included on Form 1099-B starting in tax year 2012. Form 1099-B includes: The amount of your mutual fund sale. The cost basis amount when covered shares are sold. If the shares were held short-term or long-term.3 If the sale included a wash sale and the amount. Note: The IRS will rely upon the cost basis information on Form 1099-B for covered shares. Please consult your tax advisor to ensure you are accurately reporting the values on your personal tax filing.

¹ This also includes shares that do not have complete cost basis information, regardless of purchase date.
² We do not provide average cost for retirement, education, or money market accounts.  There may be circumstances preventing a specific account from having cost basis information.
³ Short-term holdings are shares sold within one year of purchase. Long-term holdings are shares sold more than one year after purchase.

Unless you instruct us otherwise, we use average cost as the cost basis method for the sale of your covered shares. However, you can choose an alternative method.

The IRS permits the following three cost basis accounting methods for covered and noncovered shares. You may choose different methods for each fund you hold.

Average cost	This is the most common method for mutual funds. Your cost basis can be determined using the following calculation: Total costs of all shares   =  Average cost per share Total number of shares in the account Starting in 2012, your account may maintain two separate average costs: one average for covered shares and a separate average for noncovered shares. As of April 2011, the average cost double-category method is no longer allowed by the IRS.
First-in first-out (FIFO)	The shares purchased first are sold first.
Specific lot identification	You choose the shares (or lots) to sell. Your gain or loss will vary, depending on which shares you choose. For sales where you cannot specify your lots, such as checkwriting or systematic withdrawals, a secondary cost basis method is available. If you do not select a secondary method, FIFO is used.

For covered shares, we offer additional specific identification methods:

Last-in first-out (LIFO)	The shares purchased last are sold first.
High cost	Highest-cost shares are sold first.
Low cost	Lowest-cost shares are sold first.
Loss/gain utilization	Shares with the smallest tax consequence are sold first. For sales that would result in a loss, shares considered short-term are sold first, followed by long-term shares. For sales that would result in a gain, long-term shares are sold first, followed by short-term shares, since long-term capital gains rates are more favorable.

Special handling for noncovered shares:

• As a service, we continue to provide average cost information on sales of noncovered shares on eligible accounts.⁴
• You are not required to use the cost basis information we provide. You or your tax advisor may use an alternative method for your personal tax filing.
• If you have noncovered shares, they will be sold first using average cost.
• We do not report cost basis information to the IRS for noncovered shares.
• Exceptions for specific lot identification:
  • If you selected “specific lot identification,” you may select from both covered and noncovered shares for sales.
  • Cost basis information we provide for noncovered shares may not reflect your actual cost. Refer to your personal records to determine the cost of lots sold.

⁴ We do not provide average cost for retirement, education or money market accounts. There may be circumstances preventing a specific account from having cost basis information.

The IRS will rely upon the cost basis information on Form 1099-B for covered shares. Please consult with your tax advisor about the following:

• The tax consequences of your trading activity.
• The selection of the cost basis accounting method that best meets your needs.
• The accuracy of reporting sales on your personal tax filing.

Timing		Communication		Description		What you may need to do
June 2011		S corporation  communication		The new IRS regulation requires S corporations to report the sale of covered shares found on  the 2012 Form 1099-B Note: This only affects accounts registered as S corporations.		Submit a substitute W-9 with your corporation’s status.
October 2011		Cost basis shareholder communication		You will receive a communication regarding changes in cost basis reporting in your third-quarter statement. Note: Retirement, education, and money market accounts are not subject to this regulation.		If you would like to use the average cost method for your account(s), no action is required. As of October 2011, you are able to choose an alternative cost basis method online or use the Cost Basis Options form.
January 1, 2012		Mandatory cost basis regulation begins		The new cost basis regulation is in effect for covered shares.  You will see additional cost basis enhancements to the transaction confirmations and statements due to the new regulation.		If you would like a method other than average cost, it is important to make the change before your first sale of covered shares.
February 15, 2012		Form 1099-B		There are changes to Form 1099-B to accommodate the new cost basis reporting requirements.  The IRS is developing additional forms for your personal tax returns.		Talk to your tax advisor regarding the regulation and changes to your personal tax forms.
February 15, 2013		Form 1099-B		Beginning with the 2012 Form 1099-B, cost basis information will be provided to you and the IRS when covered shares are sold.		Covered shares: The IRS will rely upon the cost basis information on Form 1099-B for covered shares. Noncovered shares: You are not required to use the cost basis information we provide. You or your tax advisor may use an alternative method.

For closed-end funds, first-in first-out (FIFO) is used as the cost basis method for the sale of your covered shares. If you would like to use another method, please contact your financial advisor, broker or Computershare.

If you sell shares at a loss and purchase shares in the same fund within 30 days before or after the sale, the IRS considers the purchase to have “washed” all or a portion of your loss. The IRS designed this rule to discourage investors from selling securities solely for the purpose of generating a tax loss. 

Please refer to IRS Publication 550, Investment Income and Expenses, for more information on wash sales.

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