Understanding Cost Basis

Cost basis is simply the original value, or purchase price, of an asset for tax purposes. It is adjusted along the way for reinvested dividends and capital gains, and return of capital distributions that are all taxed in the year they occur.

Knowing your cost basis can be useful in calculating taxable gains on your investment and potential tax obligations for non-retirement accounts, including individual, joint, custodial (UGMA/UTMA), transfer on death, S-corporations, trusts and certain business and investment clubs.

Learn important cost basis accounting methods.

In the absence of shareholder instructions, mutual fund companies must select a default method for tracking and reporting cost basis. The Janus default method is Average Cost accounting.

Default Method: Average Cost

Average Cost accounting provides simple tracking and depletion for fund shares. Many of our investors are accustomed to this method, as Janus has been providing this information as a customer service for many years. This method averages the price per share paid of all fund purchases and depletes shares in proportion based upon the amount of each redemption.

First In, First Out (FIFO)

The FIFO method sells shares in the order they were purchased, with older shares generally being depleted first.

Last In, First Out (LIFO)

This accounting method is used to sell off the most-recent purchased shares first. The difference between the sale price and the original price is the potential taxable gain or loss.

Highest Cost, First Out (HIFO)

The HIFO accounting method sells the highest-cost shares before all others. If you bought shares at varying times for different amounts, you may owe fewer taxes when you take the withdrawal. Eventually, as you deplete the lowest-cost shares, taxes will be owed and may be larger at that point in time.

Lowest Cost, First Out (LOFO)

The Lowest Cost, First Out method dictates that shares with the lowest cost are sold before all others. The difference between the sale price and the original buy price determines the taxable gain or loss.

Loss Gain Utilization (LGUT)

LGUT evaluates losses and gains as well as holding periods. Tax lots (shares purchased together) with losses are depleted before tax lots which would register gains. For lots that yielded a loss, short-term lots are redeemed ahead of long-term lots. For gains, long-term lots are redeemed ahead of the short-term lots. You can’t use the same shares to calculate the cost basis multiple times, but taxes could potentially be minimized.

Specific Lot Identification (SLID)

The Specific Lot Identification method allows you to manage your tax obligation by identifying the specific shares that may be most beneficial to sell for tax purposes. For example, you may choose to sell shares that have been owned for more than a year to avoid a short-term capital gain. This method may help you to pay taxes at the lower rate for long-term investments.

If you use this method, a secondary method is applied in the case that redemption requests can be fulfilled without additional instructions. The secondary method will allow us to process any automatic redemptions and exchanges, and will also allow redemption requests without specifically identifying which lots to redeem). FIFO, LIFO, HIFO, LOFO and LGUT may all be selected as a secondary method. However, Janus will utilize FIFO as a secondary default if a different default is not elected in writing.

More information about cost basis

Investors may choose from a variety of cost basis accounting methods when calculating potential gains or losses and should seek professional tax advice to determine the best option based on individual circumstances. The information presented should not be construed as tax or legal advice and is provided for informational purposes only.

Learn important cost basis terms and gain a greater understanding of your investment mix.

Did you purchase your shares before Jan. 1, 2012? Read about uncovered shares.

Sometimes organizational actions affect the cost basis of shares held in funds. Read about Form 8937 and organizational actions.