Cost Basis Information

Answers to Common Questions

Answers to Common Questions About Cost Basis Reporting

The Internal Revenue Service (IRS) requires Franklin Templeton, and other mutual fund companies, to provide cost basis information to both shareholders and the IRS when certain mutual fund shares acquired on or after January 1, 2012, are sold or exchanged.

You should carefully review the cost basis information provided by Franklin Templeton and make any additional basis and holding period adjustments that are required when reporting these amounts on your federal and state income tax returns. Shareholders remain responsible for complying with all federal and state income tax laws when filing their income tax returns.

Below are answers to some common questions about cost basis reporting and the impact these reporting requirements will have on your Franklin Templeton account(s).

  • The cost basis of mutual fund shares is generally the amount paid for the shares when they were initially purchased, including any sales charges paid. Your cost basis may be subsequently adjusted for wash sales, deferred sales charges and other items. When these shares are sold or exchanged, you may have a gain or a loss on that transaction, and you may have to pay taxes on any gains earned. The capital gain or loss equals the amount realized on the sale minus the cost basis of the shares sold and must be reported to the IRS on your tax return.

    In short, cost basis is used to determine capital gains and losses for tax purposes when mutual fund shares are sold or exchanged. There are different methods for calculating cost basis, and investors may choose the method they feel is appropriate given their personal tax situation.
  • No. Cost basis reporting does not apply to retirement, money funds, 529 College Savings Plan accounts and Coverdell Education Savings Accounts (ESAs).

  • Franklin Templeton shareholders can choose between two methods:

    1. Specific Share Identification (SSI) — this method requires that you identify which tax lots you want to sell or exchange at the time of the transaction and use the adjusted basis of those shares to determine your gain or loss.
    2. Average Cost Method (ACM) — this method requires the calculation of an average basis for all shares in a tax account which is used to determine the capital gain or loss on a specific transaction.

    Franklin Templeton has selected Average Cost as our default cost basis method. If you sell or exchange covered shares, and would like to select a different cost basis method, you can do so at the time that you request the shares be sold. You may want to consult your tax advisor to determine which cost basis method is best for you.

  • Covered shares generally refer to mutual fund shares that were acquired by purchase, including dividend reinvestment, on or after January 1, 2012, and are subject to cost basis reporting.

    Noncovered shares generally refer to mutual fund shares acquired by purchase, including dividend reinvestment, prior to January 1, 2012, and thus, are not covered by the cost basis reporting regulations. There is no legal requirement for Franklin Templeton to report the cost basis of these shares.

    If shares are received by transfer from a brokerage firm into a Franklin Templeton account, they will be considered covered shares as long as the firm provides timely, accurate cost basis information for the shares transferred. They will be considered noncovered shares if the brokerage firm does not provide cost basis information at the time of the transfer, or states that the shares being transferred are noncovered.

  • If you do not choose a cost basis method prior to your first sale or exchange of covered shares, Franklin Templeton will process the request using our default cost basis method of average cost. However, you will still have the option to change your method for any future transactions.

  • Even though it is not mandatory that you make a cost basis method selection, we do encourage you to speak with a tax advisor prior to requesting any monetary transactions for your account(s). A tax advisor can help you determine which specific method will be the most beneficial for your tax situation.

    If you have not already done so, you, or your financial advisor acting on your behalf, may be asked to choose a cost basis method prior to the transaction being completed. If no method is selected at the time of the transaction, Franklin Templeton's default method of Average Cost will be used for calculating the cost basis of shares sold.

    If you choose Specific Share Identification as your method, you (or your financial advisor) will need to identify the specific shares to be sold or exchanged or provide lot relief order instructions at the time of the transaction.

    You will only need to provide a cost basis method for covered shares, as noncovered shares will be processed with Average Cost as the cost basis reporting method.

  • You may request changes to your method and standing lot relief order at the time of the transaction or in advance by the following methods:

    • Online: Sign in, select 'Cost Basis Center', and click 'Modify' under the 'Cost Basis Method' column.
    • Telephone: Contact Shareholder Services directly. Be sure to have your account number on hand.
    • Writing: Indicate your account number(s), cost basis method selection and standing lot relief order. Be sure to sign your request before mailing.
  • You can either inform us of the order in which to sell or exchange shares at the time of the transaction, or you may provide us with Standing Lot Relief Order (SLRO) instructions (via telephone or in writing) that would apply to all future transactions. An SLRO is an instruction that you provide to Franklin Templeton that indicates the shares to be sold or exchanged in a particular order. The following relief orders are available:

    • First In, First Out (FIFO) — The first shares acquired are the first shares sold or exchanged.
    • Last In, First Out (LIFO) — The last shares acquired are the first shares sold or exchanged.
    • Highest In, First Out (HIFO) — The shares with the highest basis are the first shares sold or exchanged.
    • Lowest In, First Out (LOFO) — The shares with the lowest basis are the first shares sold or exchanged.
    • Specific Lot Identification (SLI) — Specific shares are selected to be sold or exchanged.
       

    If the shares being sold or exchanged are not specified when the transaction is requested and you do not have an SLRO associated with your account, then shares will be sold or exchanged in FIFO order.

  • If you sell or exchange covered shares, you will receive a Form 1099-B, reporting the cost basis of those shares. The Form 1099-B will also include the gross proceeds received from the sale or exchange and whether the gain or loss was short-or long-term. This information will also be reported to the IRS.

  • Yes. You are still required to report the cost basis of the shares sold or exchanged, as well as capital gains and losses on your transactions for both covered and noncovered mutual fund shares on your income tax returns.

  • Cost basis information may be displayed on your statements or when you log in to your account(s) online.

  • We will continue to use Average Cost for accounts for which we voluntarily calculate the cost basis for noncovered shares (not all accounts qualify).

  • Unfortunately, cost basis for noncovered shares may not be calculated for all accounts due to the lack of data for certain earlier transactions. In this situation, you should consult your tax advisor if you sell or exchange noncovered shares.

  • Cost basis information will be reported on Composite Form 1099 in the 1099-B section.

  • You can expect to see information about the date of acquisition (generally the purchase date), date of sale or exchange, type of gain or loss (long-term or short-term), quantity sold (number of shares), cost basis amount, wash sale loss disallowed, whether the shares were covered or noncovered, and if the basis was reported to the IRS.

  • No. Cost basis reporting is only required when shares are sold or exchanged from your account.

For additional information on cost basis, contact your tax advisor or visit the IRS website.

Cost Basis Glossary

You may come across some of these terms in Franklin Templeton account statements, tax documents or other communications. Cost basis information may also be displayed when you are processing a sale or exchange online.

The information contained in this Tax Center is not intended to be a complete discussion of all federal or state income tax requirements. This information cannot be used by an investor to avoid any income tax penalties that may be imposed under the Internal Revenue Code. Investors should seek advice from a financial and/or tax advisor about the potential tax implications of their investments in Franklin Templeton fund(s) based on their individual circumstances.

A

Adjusted Basis

The basis of shares after taking into account any adjustments to the original basis as required by the federal tax law. Adjusted basis is then used to determine the amount of any capital gains or losses on taxable sales or exchanges of fund shares.

For most shareholders, the original basis of mutual fund shares acquired by purchase will be based on the amount paid for the shares, including any front-end sales charges, and then adjusted for wash sales, return of capital, sales load deferral and other transactions, as applicable.

Average Cost Method

A method used for calculating the cost basis of shares sold or exchanged by taking an average cost for all shares in the tax account at the time of the transaction. For tax accounts with Average Cost as the cost basis method, shares will be sold or exchanged in a First In, First Out (FIFO) order, to determine the holding period of those shares.

C

Capital Gain or Loss

Capital Gain

When the price of the shares is greater than the adjusted basis of the shares at the time of the sale or exchange.

Capital Loss

When the price of the shares is less than the adjusted basis of the shares at the time of the sale or exchange.

There are two types of capital gains and losses: 1) long-term 2) short-term.

Cost Basis

Generally, the total price paid to purchase fund shares, including any sales charges. Special basis rules apply to gifts, inheritances and other types of account transfers.

When shares are sold or exchanged, the adjusted basis is compared with the sales price to determine whether there is a capital gain or loss.

Covered Shares

Generally, shares acquired by purchase, including dividend reinvestment, on or after January 1, 2012.

Shares acquired by gift, inheritance or other transfer occurring on or after January 1, 2012, may also be considered covered shares.

D

Default Cost Basis Method

The method that will be utilized by the mutual fund company for accounts in which no method is previously noted or chosen at the time covered shares are sold or exchanged. Franklin Templeton's default method is Average Cost.

If the shareholder's account is held by a brokerage firm, the firm may select a different default cost basis method. In these cases, shareholders should contact the firm to obtain additional information regarding cost basis reporting.

Depreciated Shares

Fund shares may be depreciated shares for purposes of the federal basis rules applicable to gifts.

Shares are depreciated in value, if at the time of the gift, the donor's adjusted basis in the shares exceeds the fair market value of the shares.

Disposition of Shares

When shares are sold, exchanged, gifted, inherited, or otherwise transferred to another account.

Sales and exchanges are generally taxable transactions.

Dual Basis Rule

The dual basis rule is used to determine the basis when depreciated shares are gifted.

Under this rule, the basis of depreciated shares is not determined until the time of disposition of the gifted shares. The basis for determining capital gain on the disposition, if any, is based on the donor's adjusted basis on the date of gift. The basis for determining capital loss on disposition, if any, is based on the fair market value of the shares on the date of gift. No capital gain or loss results if the shares are sold at a price between the donor's adjusted basis and fair market value of the shares on the date of the gift.

F

Fair Market Value (FMV)

Applies only when shares are gifted or inherited.

The total value of the shares being gifted or inherited on a specific date. The value is calculated by multiplying the last quoted net asset value (NAV) price per share on a particular date by the total number of shares.

The fair market value of gifted shares on the date of gift is generally required to determine the basis of the gifted shares at the time they are gifted. The fair market value of inherited shares on the valuation date, which is generally the date of death (or six months thereafter), is generally required to determine the basis of inherited shares.

First In, First Out (FIFO)

Is a relief order in which the first shares acquired are the first shares sold or exchanged.

G

Gain

Refer to Capital Gain/Loss

Gifted Shares

Shares that are transferred from one individual to another in the form of a gift. Special federal basis rules apply to gifts.

Gross Proceeds

The amount paid to the shareholder when shares are sold for cash, or the value of the transaction when shares are exchanged between funds, in a taxable exchange.

H

Highest In, First Out (HIFO)

Is a relief order in which the shares with the highest basis are the first shares sold or exchanged. This relief order is only available to those shareholders that have chosen Specific Share Identification (SSI) as their cost basis method.

Holding Period

Generally the period of time that shares are held by the shareholder from the time they are acquired to the time they are sold or exchanged. The holding period can be short-term, where shares are held for one year or less; or long-term, where shares are held for more than one year.

Special holding period rules apply to gifted and inherited shares and other transactions.

I

Inherited Shares

Shares that are transferred from one individual to another due to death.

Special federal basis rules apply to inherited shares.

L

Last In, First Out (LIFO)

Is a relief order in which the last shares acquired are the first shares sold or exchanged.

This relief order is only available to those shareholders that have chosen Specific Share Identification (SSI) as their cost basis method.

Long-Term Capital Gain

When the price of the shares is greater than the adjusted basis of the shares at the time of the sale or exchange.

The gain is long-term if the shares were held for more than one year.

Loss

Refer to Capital Gain/Loss.

Lot

Refer to Tax Lot.

Lot Relief Order

Refer to Relief Order.

Lowest In, First Out (LOFO)

Is a relief order in which the shares with the lowest basis are generally the first shares sold or exchanged.

This relief order is only available to those shareholders that have chosen Specific Share Identification (SSI) as their cost basis method.

N

Noncovered Shares

Generally, shares acquired by purchase, including dividend reinvestment, before January 1, 2012.

Shares acquired by gift and inheritance after that date may also be considered noncovered shares.

Sales and exchanges of noncovered shares are not subject to annual cost basis reporting by mutual fund companies to the Internal Revenue Service.

R

Relief Order

The order in which shares from an account will be sold or exchanged for cost basis purposes. The following relief orders are available:

  1. First In, First Out (FIFO)
  2. Last In, First Out (LIFO)
  3. Highest In, First Out (HIFO)
  4. Lowest In, First Out (LOFO)
  5. Specific Lot Identification (SLI)

Return of Capital

When a fund makes a distribution in excess of its current and accumulated earnings and profits.

A return of capital distribution is not currently taxable to shareholders, but reduces the cost basis of fund shares. A return of capital in excess of the cost basis of fund shares is treated as a capital gain.

S

Sales Load Deferral

An adjustment to the basis of fund shares that results when the shareholder does the following:

Pays a front-end sales charge at the time of purchase, sells or exchanges those shares within 90 days of purchase, then reinvests in shares of the same fund with no front-end sales charge, or a reduced front-end sales charge.

If these circumstances are met, the amount by which the front-end sales charge is reduced is applied as a basis adjustment to the shares re-acquired.

The sales load deferral rule only applies if shares are re-acquired by January 31st of the calendar year following the year of the disposition of the original shares.

The cost basis rules require mutual fund companies, such as Franklin Templeton, to apply the sales load deferral rules when determining the adjusted basis of a covered security only when the sales load deferral occurs in the same tax account (this is how we report adjusted basis on Form 1099-B). However, it is the shareholder's responsibility to report sales load deferrals across all the Franklin Templeton taxable accounts they own.

Specific Lot Identification (SLI)

When the shareholder selects the specific tax lots to sell or exchange from the account.

Specific Share Identification (SSI)

A method used for calculating the cost basis of shares sold or exchanged by taking the adjusted basis of the specific lots selected for the transaction. Shareholders may either select the specific lots for each transaction or designate a standing lot relief order (SLRO) on the account.

Specified Private Activity Bond Interest

Specified private activity bond interest is the portion of any tax-exempt interest dividends paid by the fund attributable to the fund's investment in specified private activity bonds. Specified private activity bonds are bonds issued by or on behalf of the local or state government for the purpose of financing certain private activities.

Standing Lot Relief Order (SLRO)

An instruction on an account provided by the shareholder to automatically apply a lot relief order to all future exchanges and redemptions.

Applies only to those shareholders who have chosen Specific Share Identification (SSI) as their cost basis method.

T

Tax Account

For cost basis reporting purposes, a way of distinguishing between covered and noncovered shares in the same Franklin Templeton shareholder account.

In cases where the tax characteristics of shares differ, additional tax accounts may be required.

Tax Lot

A group of shares in the same tax account with the same basis and holding period, such as all shares purchased on the same day and at the same price. If separate purchases are made on the same day, then separate tax lots will be created for each purchase.

Transfer

When shares change ownership but remain in the same fund. Transfers usually occur when the shares are gifted or inherited. Transfers can also occur due to divorce.

W

Wash Sale

When shares are sold or exchanged at a loss and all or a portion of those shares are repurchased within a 61-day period beginning 30 days before and ending 30 days after the date of exchange or redemption.

A wash sale results in a full or partial disallowance of the loss and the amount of the loss is added to the basis of the repurchased shares.

The cost basis rules require mutual fund companies, such as Franklin Templeton, to apply the wash sale rules when determining the adjusted basis of a covered security only when the wash sale occurs in the same tax account (this is how we report adjusted basis on Form 1099-B). However, it is the shareholder's responsibility to report wash sales across all owned taxable accounts in the same fund.