NewsFrequently Asked Questions (FAQs) about cost basis
If your question is not answered below, please call 1-800-258-3030 Monday through Friday between 8:30 a.m. and 5:00 p.m. ET to speak with a representative. Please note that our representatives cannot give specific tax advice. For tax-specific information, consult your tax professional.
1. What is cost basis?
Cost basis is generally the price paid for your shares, adjusted for return of capital, certain corporate actions, and any sales charges or transaction fees. Cost basis is an important calculation used to determine gains and losses on any shares sold in a taxable (non-retirement) account. This information is required to prepare a tax return.
2. What is the new cost basis legislation?
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act, which requires brokers to report adjusted cost basis for taxable accounts to the IRS and taxpayers via Form 1099-B starting with tax year 2011. For mutual funds, the legislation applies to shares acquired on or after the effective date of January 1, 2012.
3. Do I have to return the election form I received in the mail? What happens if I do not submit a selection form?
Homestead Funds has selected Average Cost as the default method for cost basis reporting. You have the option to choose this default or you may choose any of the other cost basis reporting methods. This election is good for all future transactions unless you either revoke or change the election. For more information about cost basis reporting methods, please see the third quarter issue of Horizons.
4. What cost basis method is best for me? How can I decide?
It depends on your personal tax situation. Homestead Funds does not offer tax advice, so you should consult with your tax professional to decide which option is best for you.
5. What is the purpose of the cost basis method I choose?
The cost basis method determines which tax lots are sold first. A tax lot consists of one or more shares of a security purchased at the same price on the same day.
6. What is the difference between covered and uncovered securities?
Covered refers to securities acquired on or after the effective dates in the legislation (January 1, 2012, for mutual funds). Non-covered refers to securities acquired prior to the effective dates.
7. Which shares will be used when I request a redemption?
All non-covered shares will be depleted before the covered shares. The non-covered shares will be depleted starting with the oldest shares first. For shareholders who proactively elect a method other than Average Cost or Specific Lot Identification, you have the option to use the same cost basis accounting method that you have chosen for your covered shares to deplete non-covered shares. If you wish to use the same cost basis accounting method that you have elected for your covered shares, please contact us at the number noted above.
8. Am I able to change my election?
Effective January 1, 2012, if you have not proactively elected a basis method, you may retroactively change the fund's default to another method before the date of the first redemption or transfer. Whether you are changing from average cost to another basis method or changing to average cost from another basis method, that request must always be in writing. You may always change your cost basis method on future purchases, no matter what cost basis method you choose.
9. Who's responsible for reporting cost basis, gains and losses to the IRS?
Taxpayers are required to report the sale of capital assets on their Form 1040 individual income tax returns using Schedule D. Homestead Funds helps by reporting the transaction to both you and to the IRS.
Prior to implementation of the rule, Homestead Funds was required only to report the proceeds of investment sales - not the actual gain or loss. Under the new federal rules Homestead Funds will report to the IRS gains and losses realized from the sale of your mutual fund shares purchased after Jan. 1, 2012.
10. How will my gain/loss be reported?
Beginning in 2012, Homestead Funds will report summary cost basis information to you on your quarterly and year-end statements, and you will receive a Form 1099-B showing sales proceeds for each closing sale transaction. Basis information will be reported along with the calculated gain or loss on the trade. The gain or loss will be classified on the form as short-term or long-term based on the acquisition date of the security. The information reported to you on Form 1099-B will also be reported to the IRS.
