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TAX ANSWERS
Track Your Basis
by Kevin McCormally

Our brokerage confirmation sheet shows number of shares, share price and total price, but it does not show the cost of loads or commissions. How are these added to the cost basis?

The load is part of your tax basis. Here's an excerpt from my (now out of print) book, Cut Your Taxes:

Except for money-market funds -- in which the value of shares remains constant at $1 per share -- the price of mutual-fund shares fluctuates, just like the price of individual stocks and bonds. When you sell shares, you need to know exactly what your tax basis is to pinpoint the taxable gain or loss.

As noted earlier, your basis is basically how much you've invested in a fund. You compare that amount to what you get when you redeem shares to see if you have a profit or a loss. That doesn't seem too baffling. So what's the problem? Here's the problem:

If you invest $1,000 in a no-load fund whose price is $10 per share, your basis for each of your 100 shares is $10.

If you invest $1,000 in a fund with an 8.5% load and costs $9.15 a share, your tax basis for each of your 100 shares is, again, $10. (Although your shares are worth just $9.15 each, the tax law acknowledges that the commission was certainly part of their cost.)

If you inherit 100 shares from your grandmother who purchased them for $1 each but they were worth $10 each when she died, your basis is, yes, $10.

If Uncle Ed gives you 100 shares for which he paid $10 each but which were worth $25 each at the time of the gift, your basis is -- you guessed it -- $10 ...

To see how important it is to keep track of all the details, including sales commissions, consider this example:

Fund A has no load, Fund B has an 8.5% load. Assume that when you invest, the shares in each fund have a net asset value of $20. If you put $1,000 in the no-load fund, you get 50 shares, each with a tax basis of $20.

Invest in the load fund, however, and $85 of the $1,000 will go to pay the commission. The remaining $915 buys 45.75 shares, each with a basis of $21.86.

Now, assume you redeem the shares for $21 each. Your investment in Fund A will result in a $50 gain ($1,050 proceeds -- $1,000 basis). The investment in Fund B leaves you with a $39.25 loss ($960.75 proceeds -- $1,000 basis).