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To determine whether you have a capital gain or loss on shares you sold or exchanged, you must establish your cost basis. Cost basis is the price you paid for your shares including any sales charges. Your cost basis may not be the same for all shares because the price may have varied if you made purchases at different times. Shares you acquired through reinvested dividends or capital gains are also considered separate purchases and should be included in your calculations.
The difference between your cost basis and the amount you received when you sold or redeemed your shares represents your gain or loss. If you held your shares as a capital asset, the gain or loss that you realize will be a capital gain or loss and will be long-term or short-term, generally depending on how long you have held your shares.
A wash-sale transaction occurs when you sell shares at a loss and purchase new shares (including reinvested dividends) in the same fund within a 61-day period, beginning 30 days prior to the sale and ending 30 days after the sale. With wash sales, you may not be able to claim some or all of the capital loss immediately. The amount of any postponed loss is added back to the cost basis of the new shares you purchased in the wash-sale transaction. When you eventually sell those shares, your average cost will reflect the postponed loss amount.
Any sales load charges included in the cost basis of the shares purchased will result in a reduction of the capital gain (or an increase of the capital loss) upon the redemption or exchange of the shares. However, special rules apply to shareholders who have reinvestment privileges that allow them to use the redemption proceeds of their original investment to purchase shares in another fund of the same mutual fund family without incurring an additional sales load charge. A shareholder cannot include the sales load charge in the cost basis of acquired shares if the shareholder redeems or exchanges those shares within 90 days of the purchase date and acquires new shares in the same mutual fund family for which the sales load charge is waived. Instead, the amount of the sales load charge should be added to the cost basis of the newly acquired shares.
Long-term capital gains distributions from a mutual fund are generally reported as long-term capital gains regardless of how long you owned shares in a fund. However, if you owned shares for less than six months, received a long-term capital gains distribution on these shares, and sold them at a loss, part or all of the loss on the sale of the shares (which would normally be short-term based on the holding period) may be recharacterized as long-term instead. The amount of the loss equal to or less than the long-term capital gain distribution is the amount which will be recharacterized as long term. The amount of the loss greater than the long-term capital gain distribution remains short term. See IRS Publication 564 or consult a tax advisor before making this calculation.
The average cost method
To help simplify your calculations, we have provided cost basis information on your Form 1099-B if you sold or exchanged shares in 2008 from a taxable account opened in 1993 or later (see the Average Cost Basis column to the right of box 5 on Form 1099-B). To arrive at one cost figure, we averaged the cost of your shares. This is known as the average cost method — one of four methods allowed by the IRS for determining the cost basis of mutual fund shares.
Though this is the method used by Delaware Investments to prepare your cost basis, you should consult your tax advisor to determine whether the average cost method is the most suitable for you. The IRS does not require you to use the calculations we have provided, and we will not be providing the cost basis information to the IRS. However, under the Energy Improvement and Extension Act of 2008, we will be required to provide the IRS with the cost-basis information for shares purchased on or after Jan. 1, 2012, subject to certain exceptions.
If you or your tax advisor are using a method other than the average cost method, your year-end account statement, sent to you in early January, may provide you with much of the information needed to calculate cost basis, including:
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The number of shares you purchased in 2008;
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The price you paid per share on the date of purchase; and
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When and for how much you sold and/or exchanged shares in 2008.
If you purchased fund shares before 2008, statements from previous years can be used to obtain purchase prices. If you did not save your old statements, our shareholder service representatives are available to assist you. Call 800 523-1918 weekdays 8 a.m. to 7 p.m. Eastern time.
For information on how to report mutual fund distributions on your federal tax return, please read the reverse side of your Form 1099-DIV. If you have specific questions about IRS regulations or need additional assistance in completing your tax return, you should consult your tax advisor or the IRS.
The information contained in the Tax Center is not intended to be legal or tax advice. If you need assistance preparing your tax return, please consult a tax advisor.
Information may be abridged and therefore incomplete. Any discussion pertaining to taxes in this communication (including attachments) may be part of the promotion or marketing of a product. As provided for in government regulations, advice (if any) related to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.
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