|
What is the cost basis of an investment?
Whenever you sell or redeem shares of your Franklin Templeton fund, you generally have a taxable capital gain or loss, which must be reported to the IRS on Form 1040, Schedule D. To calculate your capital gain or loss, you need to determine which shares were sold and the cost basis of those shares. The gain or loss is then determined by comparing this cost basis to the proceeds received on the redemption of fund shares.
Unless you acquired your fund shares by inheritance or gift, the cost basis of your shares usually includes your purchase price and any sales charges imposed on the purchase. Your cost basis also includes shares acquired through the reinvestment of distributions paid by your fund.
Determining cost basis is not difficult if your fund shares were acquired all on the same day and for the same price. The calculation becomes more complex when shares are acquired at various times, in various quantities and at various prices.
Sample of Cost Basis Statement
Calculating cost basis
The IRS allows you to calculate cost basis using one of four methods.
First-in, First-out (FIFO). This method assumes that the first shares acquired were the first shares redeemed. While this method is simple to apply, it may result in the realization of larger gains if the first shares you acquired were purchased at the lowest prices. The IRS assumes FIFO is used if one of the other three methods is not specified on your income tax return.
Average Basis—Single Category. Under this method, the shareholder must divide the cumulative cost of all shares in the account (including reinvested distributions) by the total number of shares held at the time of the sale or redemption. The holding period of the shares sold is determined on a FIFO basis. This method is most commonly used by mutual funds (including Franklin Templeton) when providing cost basis information to its shareholders.
Average Basis—Double Category. This method is very similar to the Average Basis—Single Category method above, except that your shares are first separated into 2 categories, short-term (held 1 year or less) and long-term (held more than 1 year) shares. The average cost of shares in each category is then computed separately.
This method results in additional record keeping and requires that written instructions be provided to your selling agent in advance as to which category shares are to be sold or redeemed. In addition, you must receive written confirmation of your specification from your agent within a reasonable time.
Specific Share Identification. Under this method, the shareholder is required to specifically identify the shares sold at the time of the sale. Although this method allows shareholders to identify the shares that will yield the most favorable tax result, it also results in additional record keeping.
You're required to provide written instructions to your selling agent in advance of any redemption as to which shares are to be sold. In addition, you must receive written confirmation of your specification from your agent within a reasonable time.
Once you've selected a method for calculating the cost basis for a particular fund, you generally cannot change to another cost basis method without the approval of the IRS. However, you can select different methods for other funds you may own. For additional information on the four available methods, please refer to IRS Publication 564, Mutual Fund Distributions.
Your Cost Basis Statement
As a service to shareholders, Franklin Templeton has provided a Cost Basis Statement (CBS) to eligible shareholders who receive Form 1099-B statements for 2007. Your CBS provides the information you need to report gains or losses from redeemed or exchanged shares under the Average Basis—Single Category method.1
The CBS summarizes the average cost basis and determines the amount of capital gains or losses from the sale, exchange or redemption of your Franklin Templeton fund shares during 2007. The CBS calculations are based on your account transactions processed through December 31, 2007.
If you have transactions processed after this date through January 30, 2008 (for example, a wash sale applicable to the 2007 calendar year), an amended CBS will be sent to you in February.
Franklin Templeton does not forward the CBS to the IRS or any state taxing authority. While this information may be used for federal and state income tax reporting purposes, please consult your tax advisor to determine if the Average Basis—Single Category method is available to you and, if so, whether it's appropriate for your income tax purposes.
A copy of your CBS has also been sent to your financial advisor. If you'd like a complete list of your account transactions and the average cost basis of each transaction, you may request a Statement of Average Cost by calling a Franklin Templeton Shareholder Services Associate at 800/632-2301 (TDD [Hearing Impaired] 800/851-0637).
|
