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Cost Basis Reporting and Your Account

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.

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).

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

Important Legal Information

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.


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 an exchange or redemption 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 being sold or exchanged by taking an average cost for all shares in the tax account at the time of the sale or exchange. For tax accounts with Average Cost as their cost basis method, shares will be treated as sold or exchanged in a First In, First Out (FIFO) order in order to determine the holding period of the shares sold or exchanged.
C
Capital Gain or Loss
Capital Gain
When the selling 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 selling 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 front-end 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. For additional information, please contact your tax advisor.
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 of the decedent (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 generally the first shares sold or exchanged.
G
Gain
Refer to Capital Gain/Loss.
Gifted Shares
Those shares that are transferred from one individual to another in the form of a gift. Special federal basis rules apply to gifts. For more information on gifted shares, please contact your tax advisor.
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. For more information, please contact your tax advisor.
I
Inherited Shares
Shares that are transferred from one individual to another due to the death of a shareholder.

Special federal basis rules apply to inherited shares. For more information, please contact your tax advisor.
L
Last In, First Out (LIFO)
Is a relief order in which the last shares acquired 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.
Long-Term Capital Gain
When the selling 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
S Corporation
An S corporation is one that has elected to be treated as such under Subchapter S of the Internal Revenue Code. S corporations are subject to annual cost basis reporting to the Internal Revenue Service for taxable redemptions or exchanges of covered shares.
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 all the above 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 that mutual fund companies, such as Franklin Templeton, must 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. The shareholder may want to discuss these types of transactions with their tax advisors.
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 being 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 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 that will exist in the same Franklin Templeton account.

In cases where the tax characteristics of shares differ, additional tax accounts may be required.
Tax Lot
A grouping of shares in the same tax account with the same basis and holding period, such as all shares purchased at the same time 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 that mutual fund companies, such as Franklin Templeton, must 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. Shareholders may want to discuss these types of transactions with their tax advisor.

Important Legal Information

For information on any of our funds, contact your financial advisor or download a free prospectus. Investors should carefully consider a fund's investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

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