FAQ: New Cost Basis Reporting Requirements
The Energy Improvement and Extension Act of 2008 put into place new Internal Revenue Service (IRS) regulations that require mutual fund companies to provide cost basis and holding period reporting to both the IRS and shareholders on the sale or exchange of mutual fund shares acquired on or after January 1, 2012 in eligible taxable accounts.
To help you understand the new cost basis regulations for Dimensional's fund shares, we have prepared the following list of frequently asked questions. Detailed information can also be obtained by visiting the Internal Revenue Service site.
What is cost basis?
Your cost basis is the original price you paid for your Dimensional Fund shares adjusted to include the effect of commissions, fees, reinvested dividends and capital gains. The difference between your cost basis and your sale price determines the capital gain or loss on your investment, which is taxable. The method used will determine which specific shares are treated as sold when there are multiple purchases at differing prices, and the entire position is not sold at one time. Cost basis reporting is required by federal law. Even though we will report any cost basis for the sale of Dimensional’s fund covered shares to you and the IRS, you will be responsible for reporting any capital gain or loss information for both covered and non-covered shares to the IRS in your annual tax filing.
What are covered versus non-covered shares?
The new IRS regulations make the distinction between covered and non-covered shares in a taxable account:
Beginning with the 2012 tax year, if you redeem eligible covered shares from your account, the annual IRS Form 1099-B that you will receive will provide cost basis and gain or loss information specific to the covered shares redeemed. This information will be reported to you and to the IRS for eligible covered shares only. As a service to you, we will continue to report any cost basis information we have on non-covered shares as a service to you. The non-covered shares data is for informational purposes and is not required by or reported to the IRS.
The Dimensional Funds are not required to, and in many cases the Funds do not possess the information to, take all possible basis, holding period or other adjustments into account in reporting cost basis information to you. Therefore, you should carefully review the cost basis information provided by the Funds, and make any additional basis, holding period or other adjustments that are required by the Internal Revenue Code when reporting these amounts on your federal income tax return. Shareholders remain solely responsible for complying with all federal income tax laws when filing their federal income tax returns.
What types of accounts are eligible to choose a cost basis calculation method through Dimensional?
Most taxable clients holding direct accounts with Dimensional are eligible. Cost basis reporting does not apply to shares held in tax-deferred accounts such as individual retirement accounts (IRAs) and qualified retirement plans. Clients investing with Dimensional through omnibus or other intermediary accounts should contact the intermediary (their custodian, broker-dealer, etc.) directly to identify their preferred cost basis method, find out the intermediary’s default method, or discuss any other questions you might have with respect to your account.
For eligible accounts, what cost basis calculation methods are available?
Does Dimensional recommend a particular cost basis method?
Dimensional does not provide tax advice. Please consult a tax professional to determine the most appropriate cost basis method and for information concerning your specific situation.
By what date do I need to choose a cost basis method?
The IRS regulations are effective for mutual fund shares acquired on or after January 1, 2012. After the effective date, unless you select another method, eligible taxable accounts will be assigned the average cost default method.
I missed the deadline for choosing a cost basis method. Will Dimensional choose for me?
Dimensional's default method is average cost. This method will be applied on covered shares when a client has not identified an alternate permitted method.
How do I select a cost basis calculation method?
If you would like to use average cost for your covered shares, you do not need to do anything as this is our default method. If you wish to select one of the other methods for your covered shares please contact Fund Operations at (888) 576-1167 or Operations@dimensional.com to obtain a Cost Basis Method Election Form. This election is good for all future transactions unless you either revoke or change the standing election.
How do I change my cost basis calculation method?
You may change your cost method election on covered shares at any time by contacting Fund Operations at (888) 576-1167 or Operations@dimensional.com to obtain a Cost Basis Method Election Form. If you change your cost basis calculation method after a sale or exchange of covered shares, the new cost basis will apply only to shares acquired after the date the change request is processed. Updating your election either to or from average cost must be done in writing and you will only be permitted to revoke this method retroactively up to the point in time when the first covered shares subject to average cost are redeemed. Under the IRS regulations, any revocation of average cost after that time may only be applied prospectively for covered shares acquired in the future. Clients should consult their tax professional on changing cost basis methods prior to requesting changes.
Am I required to choose one cost basis method for all redemptions or can I choose the method at the time of the redemption?
A cost basis method must be chosen on the account or the default cost method of average cost will apply. The specific lot identification method would allow you to identify to us the specific shares you want to sell or exchange at the time of each sale or exchange as stated above. You may change your cost method election on covered shares at any time per the instructions listed above.
What happens when I redeem shares?
When you sell shares from your account, we will deplete shares and calculate the cost basis on those shares according to your Cost Basis Method Election Form. If you do not designate the cost basis calculation method to be used prior to or at the time of your redemption, the trade will be processed using our default method of average cost. Unless you otherwise direct with a Specific Lot Identification, Dimensional will follow the financial industry best practice of depleting non-covered shares with unknown cost basis first, then non-covered shares with known basis, followed by covered shares.
What do I need to provide on redemptions if I choose the Specific Lot Identification Method?
If you choose the Specific Lot Identification you will identify to us the specific shares you want to sell or exchange at the time of each sale or exchange on the trade request. The original purchase dates and prices of the shares you choose will determine your cost basis and holding period. At the time of redemption, you must provide to us the following lot information on the shares you want to sell:
Do I need to provide Specific Lot Identification on Non-Covered Shares?
All non-covered shares will be aggregated by our transfer agent and will be valued at an average cost of all lots owned prior to January 1, 2012 and will not be reported to the IRS. Lots prior to January 1, 2011 will actually be stored as an aggregate “inception lot” for cost basis purposes while 2011 purchases will be maintained as separate lots but all will be valued at average cost as they are “non-covered shares.” Therefore, the information that we provide to you on redemption of non-covered shares will be on an average cost aggregated lot basis and may differ from the specific lot information that you report to the IRS for non-covered shares.
You should carefully review the cost basis information provided by the Funds, and make any additional basis, holding period or other adjustments that are required by the Internal Revenue Code when reporting these amounts on your federal income tax return. Shareholders remain solely responsible for complying with all federal income tax laws when filing their federal income tax returns.
Where can I get more information?
The Internal Revenue Service site has a detailed description of the cost basis reporting requirements.
To help you understand the new cost basis regulations for Dimensional's fund shares, we have prepared the following list of frequently asked questions. Detailed information can also be obtained by visiting the Internal Revenue Service site.
What is cost basis?
Your cost basis is the original price you paid for your Dimensional Fund shares adjusted to include the effect of commissions, fees, reinvested dividends and capital gains. The difference between your cost basis and your sale price determines the capital gain or loss on your investment, which is taxable. The method used will determine which specific shares are treated as sold when there are multiple purchases at differing prices, and the entire position is not sold at one time. Cost basis reporting is required by federal law. Even though we will report any cost basis for the sale of Dimensional’s fund covered shares to you and the IRS, you will be responsible for reporting any capital gain or loss information for both covered and non-covered shares to the IRS in your annual tax filing.
What are covered versus non-covered shares?
The new IRS regulations make the distinction between covered and non-covered shares in a taxable account:
- Covered shares include any of Dimensional's fund shares acquired on or after January 1, 2012 where the cost basis of the shares is known by the Fund. We are required to report the cost basis for any sales or exchanges of covered shares to you and the IRS.
- Non-covered shares are any of Dimensional's fund shares acquired before January 1, 2012 or shares acquired on or after that date for which the cost basis of the shares is not known to the Fund. Because they are not covered by the new rules, we are not required to report cost basis for these shares to the IRS. We will continue to annually report to you the cost basis of any eligible non-covered shares you redeem in a taxable account as a service to you.
Beginning with the 2012 tax year, if you redeem eligible covered shares from your account, the annual IRS Form 1099-B that you will receive will provide cost basis and gain or loss information specific to the covered shares redeemed. This information will be reported to you and to the IRS for eligible covered shares only. As a service to you, we will continue to report any cost basis information we have on non-covered shares as a service to you. The non-covered shares data is for informational purposes and is not required by or reported to the IRS.
The Dimensional Funds are not required to, and in many cases the Funds do not possess the information to, take all possible basis, holding period or other adjustments into account in reporting cost basis information to you. Therefore, you should carefully review the cost basis information provided by the Funds, and make any additional basis, holding period or other adjustments that are required by the Internal Revenue Code when reporting these amounts on your federal income tax return. Shareholders remain solely responsible for complying with all federal income tax laws when filing their federal income tax returns.
What types of accounts are eligible to choose a cost basis calculation method through Dimensional?
Most taxable clients holding direct accounts with Dimensional are eligible. Cost basis reporting does not apply to shares held in tax-deferred accounts such as individual retirement accounts (IRAs) and qualified retirement plans. Clients investing with Dimensional through omnibus or other intermediary accounts should contact the intermediary (their custodian, broker-dealer, etc.) directly to identify their preferred cost basis method, find out the intermediary’s default method, or discuss any other questions you might have with respect to your account.
For eligible accounts, what cost basis calculation methods are available?
| Default Method | Description |
|---|---|
| Average Cost | Shares are depleted on a first in, first out basis with the cost basis calculated by taking the shares redeemed multiplied by the average cost per share.
This is Dimensional's default method. If you would like to use Average Cost for your covered shares, you do not need to do anything. Your account will default to this option unless you select another method. Note: This is the method we have traditionally reported annually to you for your non-covered shares. Average cost will be calculated separately for your covered and non-covered shares. Updating your election either to or from average cost must be done in writing and you will only be permitted to revoke this method retroactively up to the point in time when the first covered shares subject to average cost are redeemed. Under the IRS regulations, any revocation of average cost after that time may only be applied prospectively for covered shares acquired in the future. |
| Other Methods | Description |
| FIFO (First In, First Out) | Shares acquired first are sold first. |
| LIFO (Last In, First Out) | Shares acquired last are sold first. |
| HIFO (Highest Cost, First Out) | Shares with the highest cost basis are sold first. |
| LOFO (Lowest Cost, First Out) | Shares with the lowest cost basis are sold first. |
| HILT (Highest Cost Long Term, First Out) | Shares with the long-term highest cost are sold first. |
| HIST (Highest Cost Short Term, First Out) | Shares with the short-term highest cost are sold first. |
| LILT (Lowest Cost Long Term, First Out) | Shares with the long-term lowest cost are sold first. |
| LIST (Lowest Cost Short Term, First Out) | Shares with the short-term lowest cost are sold first. |
| Specific Lot Identification | You identify to us the specific shares you want to sell or exchange at the time of each sale or exchange on the trade request. The original purchase dates and prices of the shares you choose will determine your cost basis and holding period.
Note: You will need to maintain records adequate to determine basis information for all of your shares and have it readily available at the time of sale. Please consider this limitation before selecting Specific Lot Identification. |
Does Dimensional recommend a particular cost basis method?
Dimensional does not provide tax advice. Please consult a tax professional to determine the most appropriate cost basis method and for information concerning your specific situation.
By what date do I need to choose a cost basis method?
The IRS regulations are effective for mutual fund shares acquired on or after January 1, 2012. After the effective date, unless you select another method, eligible taxable accounts will be assigned the average cost default method.
I missed the deadline for choosing a cost basis method. Will Dimensional choose for me?
Dimensional's default method is average cost. This method will be applied on covered shares when a client has not identified an alternate permitted method.
How do I select a cost basis calculation method?
If you would like to use average cost for your covered shares, you do not need to do anything as this is our default method. If you wish to select one of the other methods for your covered shares please contact Fund Operations at (888) 576-1167 or Operations@dimensional.com to obtain a Cost Basis Method Election Form. This election is good for all future transactions unless you either revoke or change the standing election.
How do I change my cost basis calculation method?
You may change your cost method election on covered shares at any time by contacting Fund Operations at (888) 576-1167 or Operations@dimensional.com to obtain a Cost Basis Method Election Form. If you change your cost basis calculation method after a sale or exchange of covered shares, the new cost basis will apply only to shares acquired after the date the change request is processed. Updating your election either to or from average cost must be done in writing and you will only be permitted to revoke this method retroactively up to the point in time when the first covered shares subject to average cost are redeemed. Under the IRS regulations, any revocation of average cost after that time may only be applied prospectively for covered shares acquired in the future. Clients should consult their tax professional on changing cost basis methods prior to requesting changes.
Am I required to choose one cost basis method for all redemptions or can I choose the method at the time of the redemption?
A cost basis method must be chosen on the account or the default cost method of average cost will apply. The specific lot identification method would allow you to identify to us the specific shares you want to sell or exchange at the time of each sale or exchange as stated above. You may change your cost method election on covered shares at any time per the instructions listed above.
What happens when I redeem shares?
When you sell shares from your account, we will deplete shares and calculate the cost basis on those shares according to your Cost Basis Method Election Form. If you do not designate the cost basis calculation method to be used prior to or at the time of your redemption, the trade will be processed using our default method of average cost. Unless you otherwise direct with a Specific Lot Identification, Dimensional will follow the financial industry best practice of depleting non-covered shares with unknown cost basis first, then non-covered shares with known basis, followed by covered shares.
What do I need to provide on redemptions if I choose the Specific Lot Identification Method?
If you choose the Specific Lot Identification you will identify to us the specific shares you want to sell or exchange at the time of each sale or exchange on the trade request. The original purchase dates and prices of the shares you choose will determine your cost basis and holding period. At the time of redemption, you must provide to us the following lot information on the shares you want to sell:
- Date(s) the shares were acquired
- Number of shares you want to liquidate from each acquisition date
- This information should be in writing and it is preferable that it be provided on the signed redemption order
- Note: Lot information cannot be changed by us after the settlement of the redemption trade
- Please note: If the lot information that you provide cannot be validated and determined not in good order or if you do not provide lot information by 12:00 Noon EST on settlement date (T+1), lot information will be determined for you on a First In, First Out (FIFO) basis and this lot information cannot be changed by us after settlement.
Do I need to provide Specific Lot Identification on Non-Covered Shares?
All non-covered shares will be aggregated by our transfer agent and will be valued at an average cost of all lots owned prior to January 1, 2012 and will not be reported to the IRS. Lots prior to January 1, 2011 will actually be stored as an aggregate “inception lot” for cost basis purposes while 2011 purchases will be maintained as separate lots but all will be valued at average cost as they are “non-covered shares.” Therefore, the information that we provide to you on redemption of non-covered shares will be on an average cost aggregated lot basis and may differ from the specific lot information that you report to the IRS for non-covered shares.
You should carefully review the cost basis information provided by the Funds, and make any additional basis, holding period or other adjustments that are required by the Internal Revenue Code when reporting these amounts on your federal income tax return. Shareholders remain solely responsible for complying with all federal income tax laws when filing their federal income tax returns.
Where can I get more information?
The Internal Revenue Service site has a detailed description of the cost basis reporting requirements.
The information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Dimensional cannot guarantee that such information is accurate, complete or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Always consult an attorney or tax professional regarding your specific legal or tax situation.