Cost Basis Reporting Rules
What is cost basis?
Cost basis is typically the purchase price of your mutual fund shares, including any sales charges you paid when you purchased your shares. It’s used as a benchmark to determine if a shareholder has a capital gain or capital loss when they sell or exchange their shares in the future. These gains or losses need to be reported to the Internal Revenue Service (IRS) on federal tax returns.
How have cost basis reporting rules changed?
For shares acquired after January 1, 2012, the IRS established a new rule that shifted cost basis reporting responsibilities from investors to mutual fund companies and brokerage firms. Principal Funds is now required to track and report all gains or losses from the sale or exchange of mutual fund shares in taxable accounts to both shareholders and the IRS. This information is provided on Form 1099-B.
What this means for investors?
For shares acquired before January 1, 2012 (non-covered shares), investors will still be responsible for calculating and reporting their gains and losses at tax time. For shares acquired after January 1, 2012 (covered shares), Principal Funds will provide this information to you and the IRS on Form 1099-B.
We've traditionally used the Average Cost (ACST) method for cost basis reporting and will continue to use that method for your non-covered shares on eligible accounts. It is also the default method for Principal Funds.
For covered shares, shareholders can choose how they want to report their cost basis for each account they hold.
To assist you in electing or changing the cost basis reporting method, download the Cost Basis Election form. The form also provides a brief overview of all the cost basis reporting methods available. We recommend that you meet with a qualified tax advisor to make the right cost basis decision.
What is a “wash sale”?
If you sell shares at a loss and purchase shares (including reinvested dividends) in the same fund, regardless of the account, within a 61-day period, beginning 30 days before the sale and ending 30 days after the sale, the IRS considers the purchase a “wash” sale. The loss is disallowed for tax purposes and must be added to the cost basis of the repurchased shares.
Please refer to IRS Publication 550, Investment Income and Expenses, for more information on wash sales.
*Eligible accounts are taxable mutual fund accounts. We do not provide Average Cost for retirement, education, or money market accounts. There may be additional circumstances preventing a specific account from having cost basis information.