It is important to understand the tax implications of buying and selling mutual funds.
As a result of recent regulatory changes, Janus is required to track and provide cost
basis information to the Internal Revenue Service (IRS), and we want to help investors
understand the requirements and their options.
Under the Emergency Economic Stabilization Act of 2008, Financial Institutions are required to track and report adjusted cost basis information to the IRS for shares purchased on or after January 1, 2012 (Covered Shares) and sold thereafter. The purpose of this legislation is to provide investors the means to accurately report gains or losses on the sale of securities to the IRS.
Prior to this requirement, Janus provided cost basis information using the Average Cost method as a customer service. Going forward, Janus will continue to use the Average Cost method as our default option.
Important Cost Basis Concepts:
Applicable Account Types: Cost basis reporting is generally required for non-retirement accounts. At Janus, this includes the following registration types:
- Custodial Accounts (UGMA/UTMA)
- Transfer on Death
- S Corporations
- Certain Businesses/Investment Clubs
Default Method - Mutual fund companies must select a default method to use absent of shareholder instructions. Janus has selected Average Cost as our default method because it provides simple tracking and depletion for fund shares. Additionally, 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 shares of all fund purchases and depletes shares in proportion based upon the amount of the request.
Uncovered vs. Covered Shares - The regulations require the reporting of cost basis information only for Covered Shares. Covered Shares are shares purchased on/after January 1, 2012. Tracking/reporting cost basis is not required for Uncovered Shares, which are shares purchased before January 1, 2012. For accounts where we have been tracking basis, Janus will continue to provide average cost basis for Uncovered share transactions as a customer service, but this information will not be reported to the IRS.
Available Cost Basis Methods - For your convenience, Janus will support a number of methods with standing instructions. If you wish to identify specific shares at the time of each transaction, you may elect to do so.
Average Cost - Janus's default method. This method uses the average price of shares.
First In, First Out (FIFO) - the first shares purchased (oldest shares) are depleted first.
Last In, First Out (LIFO) - the last shares purchased (newest shares) are depleted first.
Highest Cost, First Out (HIFO) - the highest cost shares are depleted first.
Lowest Cost, First Out (LOFO) - the lowest cost shares are depleted first.
Loss Gain Utilization Method (LGUT) - method evaluates losses and gains as well as holding period and depletes tax lots with losses before tax lots with gains, with the objective of minimizing taxes. For lots that yield a loss, short-term lots will be redeemed ahead of long-term lots; for gains, long-term lots will be redeemed ahead of short term lots. Shares may be used only once to calculate the cost basis.
Specific Lot Identification (SLID) - method allows the shareholder to specifically identify which shares should be depleted at the time of each redemption. If this method is selected, a secondary method may also be applied to ensure that redemption requests can be fulfilled without additional instructions (a secondary method will allow systematic redemptions and exchanges, and will also allow processing of 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.
Tax Lot - A block of shares purchased in an account with common characteristics such as acquisition date and cost per share.
Depletion Order - Tax lots consisting of Uncovered Shares will be depleted before Covered Shares, utilizing the oldest share lots first.
Revocation - The Average Cost method may be revoked until the time of the first redemption (or for a minimum of one year after the election has been made). Once a redemption has occurred using the Average Cost methodology, the shares that have been averaged together will retain the average basis until they are fully depleted. A different method may be selected for future share purchases in the account, but cannot be applied retroactively.
Method Change - The Cost Basis Method on the account may be changed at any time via janus.com/costbasis or by communicating the change in writing. As noted above, changes to Average Cost may only apply to future purchases.
Wash Sale - An IRS rule that disallows losses when substantially identical shares are purchased within the 30 days before or after the sale of a security. Cost basis is adjusted to include this amount.
It is recommended that investors 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.