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Update: Since this article was originally published, new legislation requires that mutual fund providers calculate -- and report to the IRS -- the cost basis for all mutual fund shares purchased after Jan. Investors can choose from a minimum of three cost basis accounting methods.
For mutual fund shares purchased prior to 2012, the article below still serves as a guide to selecting the appropriate, historic cost basis method.
The specific identification method enables you to choose exactly which shares you are selling.
And now for the fun part: The IRS gives you a choice of four ways to figure out your cost basis.
Each method -- first-in, first-out (FIFO), specific shares, average cost single category and average cost double category -- allows investors to manage the tax implications of each selling decision.
Unlike FIFO, you need to decide in advance of the sale if you want to use this method.
Send your mutual fund company a written request indicating the number of shares to redeem, the date they were purchased and the purchase price -- all before you sell.