[net.invest] Mutual Fund Sale Question

rosen@gypsy.UUCP (03/11/86)

I have a question concerning the purchase and sale of shares of a mutual
fund.  Hypothetically, lets make this a no-load fund currently selling at
$10 share on January 1, 1984.  My question concerns how capital gains are
computed on the sale of the fund shares at the end of some period in time.
The reason I am confused about this is because I am making the assumption
that captial gains/cash dividend distributions are always reinvested and I
am not quite sure how they figure into the final taxable amount.

Consider this schedule (ignore x-dividends and such):

1/1/84		BUY	100 @ $10		= $1000.00 (100 shares)

6/1/84		RECEIVE $110 CASH DIVIDEND
6/1/84		BUY	10 @ @ $11		= $1210.00 (110 shares)

12/1/84		RECEIVE $120 CAPITAL GAINS
12/1/84		BUY	10 @ $12		= $1440.00 (120 shares)

That's a pretty good fund isn't it? :-)

Now suppose when tax time comes around I pay my fair share of tax on the
capital gains and the cash dividends I've received.  Now I want to sell all of
the shares I own.

1/1/85		SELL	120 @ $13		= $1560.00 (120 shares)

How do I compute my capital gains on the sale of these shares?  Normally I
would just subtract the total purchase price of 1/1/84 from the sell price
of 1/1/85 which would be $560.  But unlike common stock, I have already
payed taxes on my distributions of the fund.  It wouldn't make sense to pay
tax on part of this amount twice.  Do I simply just subtract that out and I
really have a taxable amount of $560-$110-$120 = $330.  Is this right?  It
make sense to me, but it seems if I hold such a fund for 5 or ten years, I
have a hell of a lot (sort of) of accounting work to keep track of.  On
common stock I only have to remember what I orignally payed for it
(asssuming I take any dividends as cash).  I already know that the sale of a
mutual fund shares are taxable as a long term capital gain regardless of how
long I own it.  Does all this make sense?  I want to know before I entrench
myself in an accounting nightmare.  Or will most funds just send me a
complete list of all of my transactions I've made with them when I close out
my position in their fund?  That would be real nice, but I wouldn't count on
it.

S. Rosen
siemens!gypsy!rosen

okin@sun.uucp (Ken Okin) (03/14/86)

> 
> I have a question concerning the purchase and sale of shares of a mutual
> fund.  Hypothetically, lets make this a no-load fund currently selling at
> $10 share on January 1, 1984.  My question concerns how capital gains are
> computed on the sale of the fund shares at the end of some period in time.
> The reason I am confused about this is because I am making the assumption
> that captial gains/cash dividend distributions are always reinvested and I
> am not quite sure how they figure into the final taxable amount.
> 
> Consider this schedule (ignore x-dividends and such):
> 
> 1/1/84		BUY	100 @ $10		= $1000.00 (100 shares)
> 
> 6/1/84		RECEIVE $110 CASH DIVIDEND
> 6/1/84		BUY	10 @ @ $11		= $1210.00 (110 shares)
> 
> 12/1/84		RECEIVE $120 CAPITAL GAINS
> 12/1/84		BUY	10 @ $12		= $1440.00 (120 shares)
> 
> That's a pretty good fund isn't it? :-)
> 
> Now suppose when tax time comes around I pay my fair share of tax on the
> capital gains and the cash dividends I've received.  Now I want to sell all of
> the shares I own.
> 
> 1/1/85		SELL	120 @ $13		= $1560.00 (120 shares)
> 
> How do I compute my capital gains on the sale of these shares?  Normally I

	You have to treat each purchase event separately at the time of 
the sale. So for your 1985 taxes, you figure it this way:

	# shares  Price/share	Cost		Sell 		Cap gains
	100		10	1000		1300		300
	 10		11	 110		 130		 20
	 10		12	 120		 130		 10
total 	-----			----		----		---
	120			1230		1560		330

Don't forget that you have to declare the $110 dividend and the $120 capital
gains on 1984's tax forms.

Also all these sales are long term gap gains.  If you had held some of 
them for less than 6 months, the profits attributable to them would have
short term cap gains.  Life is even more interesting here in California, 
where there are short term (<1 year), intermediate term (1-5 years) and
long term (>5), vs the Feds where >6 months is long term.

> I have a hell of a lot (sort of) of accounting work to keep track of.  On

	Yup.  That's why some people pay accountants.  I have a spereadsheet
I use for keeping track of a Cal Tax Free fund whose asset value fluctates
and where I'm constatnly buying and selling as I need or have extra funds.

> common stock I only have to remember what I orignally payed for it
> (asssuming I take any dividends as cash).  I already know that the sale of a
> mutual fund shares are taxable as a long term capital gain regardless of how

	Are you sure??  I'm no tax expert, but I don't know of any
tax relief given to mutual funds.  Can you cite a reference?


> long I own it.  Does all this make sense?  I want to know before I entrench
> myself in an accounting nightmare.  Or will most funds just send me a
> complete list of all of my transactions I've made with them when I close out
> my position in their fund?  That would be real nice, but I wouldn't count on
> it.

	I've got some Dreyfus  funds.  They send quarterly accounting
of transactions but they can't figure the cap gains for you since it's
your choice which shares you decide to sell if you liquidate only part of 
your holding.

> 
> S. Rosen
> siemens!gypsy!rosen

				Ken Okin (sun!niko!okin)

roth@im4u.UUCP (Mark Roth) (03/14/86)

You are right in that you do not have to pay tax on the dividends you
already paid xes on.  However, I would think that the dividends 
you reinvested are now considered another investment, so you must
pay any capital gains on them.  Consider if you had taken the
dividends in cash and then immediately made the same investment in
the fund.  This gets really hairy when you reinvest monthly dividends
because then the last 6 month's reinvestments will be treated as
short term gains/losses and everything before that as long term.
And of course if you make monthly payments to your fund then you've
got all those seperate investments as well.   It's really not that
hard to figure out, just time consuming.

boucher@hsi.UUCP (Keith Boucher) (03/14/86)

> 
> I have a question concerning the purchase and sale of shares of a mutual
> fund.  Hypothetically, lets make this a no-load fund currently selling at
> $10 share on January 1, 1984.  My question concerns how capital gains are
> computed on the sale of the fund shares at the end of some period in time.
> The reason I am confused about this is because I am making the assumption
> that captial gains/cash dividend distributions are always reinvested and I
> am not quite sure how they figure into the final taxable amount.
> 
> Consider this schedule (ignore x-dividends and such):
> 
> 1/1/84		BUY	100 @ $10		= $1000.00 (100 shares)
> 
> 6/1/84		RECEIVE $110 CASH DIVIDEND
> 6/1/84		BUY	10 @ @ $11		= $1210.00 (110 shares)
> 
> 12/1/84		RECEIVE $120 CAPITAL GAINS
> 12/1/84		BUY	10 @ $12		= $1440.00 (120 shares)
> 
> That's a pretty good fund isn't it? :-)
> 
> Now suppose when tax time comes around I pay my fair share of tax on the
> capital gains and the cash dividends I've received.  Now I want to sell all of
> the shares I own.
> 
> 1/1/85		SELL	120 @ $13		= $1560.00 (120 shares)
> 
> How do I compute my capital gains on the sale of these shares?  Normally I
> would just subtract the total purchase price of 1/1/84 from the sell price
> of 1/1/85 which would be $560.  But unlike common stock, I have already
> payed taxes on my distributions of the fund.  It wouldn't make sense to pay
> tax on part of this amount twice.  Do I simply just subtract that out and I
> really have a taxable amount of $560-$110-$120 = $330.  Is this right?  It
> make sense to me, but it seems if I hold such a fund for 5 or ten years, I
> have a hell of a lot (sort of) of accounting work to keep track of.  On
> common stock I only have to remember what I orignally payed for it
> (asssuming I take any dividends as cash).  I already know that the sale of a
> mutual fund shares are taxable as a long term capital gain regardless of how
> long I own it.  Does all this make sense?  I want to know before I entrench
> myself in an accounting nightmare.  Or will most funds just send me a
> complete list of all of my transactions I've made with them when I close out
> my position in their fund?  That would be real nice, but I wouldn't count on
> it.
> 
> S. Rosen
> siemens!gypsy!rosen

Your capital gain is $330.  You bought 100 shares at $10 and sold them for
$13 for a gain of $300.  You bought 10 shares at $11 and sold them for $13
for a gain of $20.  You bought 10 shares at $12 and sold them for $13 for
a gain of $10.  The total gain is $330.

My understanding is that not all mutual fund capital gains are taxed as
long term.  If you buy shares on 1/1/85 and sell them less than six months
later then the capital gains (or losses) are short term.  This assumes that
the fund did not go ex-dividend during that period.  If the fund did go
ex-dividend and capital gains were distributed then they are considered 
long term.  For example, suppose you buy 100 shares of a fund for $20.00
a share on 2/1/85.  The fund then goes ex-dividend on 3/1/85 and distributes
a capital gain of $2.00 per share.  You then sell the 100 shares on 4/1/85
for $17.50 per share.  You have a capital loss of $2.50 per share but $2.00
of it is long term and $.50 of it is short term.  This example is given
in the IRS publication concerning investment income and expenses.  
Does anyone have a definitive answer on this subject?

Most (if not all) funds will send you a summary of your account and that
should be all you need to figure out your capital gains.  It can be a time
consuming task however especially if you buy a lot of shares all at
different times.

			Keith Boucher HSI New Haven, CT