Cost Basis

Starting with the 2012 tax year, Sit Mutual Funds will be required to report cost basis and gain/loss information to you and to the Internal Revenue Service (IRS). You must choose a method of cost basis calculation for each of your reportable accounts.

Please read the items below for some of the main points of this new regulation. For more detailed information on cost basis or the new regulation, please visit the IRS website www.irs.gov. If you have any questions, please call an Investor Services Representative at 800-332-5580.

 

In general, it is the amount that was paid to acquire shares of a mutual fund or other security.  When you sell or exchange those shares, the proceeds may be worth more (a gain) or less (a loss) than the amount paid for those shares.  In a taxable account, this information must be reported to the IRS. 

To calculate the gains or losses, you must know how much you paid for each purchase of shares (a share “lot”); remember to include reinvested dividends/capital gains as they are considered purchases.  Cost basis can be adjusted up or down by a number of factors (fees, wash sales, mergers, etc.), and Sit Mutual Funds will report adjusted cost basis information to the IRS as well as gains or losses.  See below under section Descriptions of Cost Basis Methods for more details.

Calculation: Proceeds from sale – Adjusted Cost Basis = Gain or Loss

 

Accounts that are already subject to Form 1099-B (shows sales of shares) reporting will now have cost basis and gain/loss information included on the Form.  Entities that have selected the “S” corporation tax classification will now be subject to 1099B reporting as well.  Tax-exempt accounts (e.g. qualified charitable organizations and foundations), IRAs and other non-reportable accounts such as “C” corporations are excluded.

 

Cost basis and gain/loss information for sales of shares which were acquired on or after January 1, 2012 (“covered shares”).  Sales of other shares (“non-covered”) may or may not have cost basis available and will not have cost basis or gain/loss information reported to the IRS on Form 1099-B.

 

You must send us a written, signed notice of your choice of a cost basis method by the time of the first sale of covered shares.  For your convenience, you may use Sit's Cost Basis Election Form.  If we do not receive a written notice in good order from you, then the default cost basis method will be average cost (all shares will have the same cost). 

 

Our transfer agent will support the following methods of cost basis lot depletion:

• Average Cost:  all covered shares will have the same cost
• First In First Out (FIFO):  first covered shares acquired are sold first
• Specific Identification:  shareholder must choose which covered shares to sell
• Seven other methods are supported as well.  See the Cost Basis Election form.

 

Terminology

Cost: Amount paid for a purchase of shares.  This amount can be adjusted (“adjusted cost”) up or down due to a number of factors (wash sales, return of capital, etc.).	Short-Term Gain/Loss: Gain or loss on sale of shares held for less than 12 months.  Taxed at ordinary income tax rates.
Share Lot: Group of shares purchased at the same time	Long-Term Gain/Loss: Gain or loss on sale of shares held for more than 12 months.  Taxed at long-term capital gains tax rate.

           
Example
The following example will be used to illustrate gains/losses within each of the cost basis method descriptions below.           
                       

                                                                       
Calculation: Proceeds from sale – Adjusted Cost = Gain or Loss

           

Method	Example
Average Cost (AVG): The total cost of all shares acquired is divided by the total number of shares purchased to arrive at an average cost per share.  The oldest shares are sold first.	Average cost is $5,000 divided by 500 shares = $10/share.  If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,000 (100 shares @ $10/sh) = $200 long-term gain.  The oldest shares, from share lot #1, are sold first.
First In First Out (FIFO): Oldest shares are sold first.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,000 (100 shares @ $10/sh from lot#1) = $200 long-term gain.
Specific Lot ID (SPEC): Shareholder must specify (in writing) each share lot to be sold at the time of each sale.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,100 (100 shares @ $11/sh from lot #2) = $100 long-term gain.  Assumes shareholder specified shares from lot #2.
Last In First Out (LIFO): Newest shares are sold first.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,000 (100 shares @ $10/sh from lot #4) = $200 short-term gain.
Highest In First Out (HIFO): Highest cost shares are sold first, regardless of when acquired.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,100 (100 shares @ $11/sh from lot #2) = $100 long-term gain.
Lowest In First Out (LOFO): Lowest cost shares are sold first, regardless of when acquired.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $800 (100 shares @ $8/sh from lot #3) = $400 short-term gain.
Highest Long-Term First Out (HILT): Highest cost long-term shares are sold first.  Short-term shares are sold only if no long-term shares exist.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,100 (100 shares @ $11/sh from lot #2) = $100 long-term gain.
Highest Short-Term First Out (HIST): Highest cost short-term shares are sold first.   Long-term shares are sold only if no short-term shares exist.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,000 (100 shares @ $10/sh from lot #4) = $200 short-term gain.
Lowest Long-Term First Out (LILT): Lowest cost long-term shares are sold first.  Short-term shares are sold only if no long-term shares exist.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $1,000 (100 shares @ $10/sh from lot #1) = $200 long-term gain.
Lowest Short-Term First Out (LIST): Lowest short-term shares are sold first.  Long-term shares are sold only if no short-term shares exist.	If 100 shares are sold September 1, 2011 @ $12/share:   Proceeds of $1,200 - $800 (100 shares @ $8/sh from lot #3) = $400 short-term gain.

 

**Above descriptions and examples are for informational purposes only and do not constitute tax advice.  This information is not intended or written to be used in connection with the promotion, marketing or recommendation for the purpose of avoiding U.S. tax-related penalties.  Please consult with your tax adviser regarding the appropriate cost basis method(s) for your tax situation.