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IRS regulations require financial service companies to track and report cost basis for taxable accounts beginning on the effective dates below:
January 1, 2011-for stock securities purchased through a brokerage firm
January 1, 2012-for mutual fund purchases
January 1, 2014-for certain bond and option securities purchased through a brokerage firm
Mutual fund clients in taxable, non-money market accounts:
When you are ready to make or change your election, please log in and select the Choose your cost basis method link1 from the My Profile page. Or print and return the Cost Basis Election Form .
1 If the link does not appear, you do not have eligible accounts.
Generally, cost basis is the purchase price of a security or share, including commissions and expenses, if applicable. You use your cost basis to determine if you have a capital gain or capital loss at the time you sell your shares. You must report capital gains and losses to the IRS for tax purposes.
When you sell or exchange shares, the transaction price is usually different from the original purchase price. If the selling price is greater than the purchase price, your profit is called a capital gain. If the selling price is less than the purchase price, your deficit is called a capital loss. You must report capital gains and losses to the IRS.
Investment Consultants at American Century Investments® are not licensed tax advisors and are unable to give tax advice. For that reason we encourage you to speak with your tax advisor to help you make the best choice for your situation.
It's important to remember the mandatory tracking of cost basis only applies to shares purchased after the effective date. This includes shares acquired through dividends and transfers. For mutual funds, this means:
Purchase Date Determines if Shares Are Non-Covered or Covered:
Select the primary cost basis method that works best for your accounts. You may select a different method per account or one method that covers all of your accounts.
The options you have depend on the type of shares you own. Review the options and the examples below to understand your choices.
* Note to Mutual Fund Clients: If you choose a method other than Average Cost, we will no longer provide Average Cost information for redemptions of any non-covered shares since that method is generally no longer applicable.
** According to the IRS guidelines, only the single category applies after January 1, 2012. This means short- and long-term shares will no longer be tracked for the purposes of the Average Cost double category.
Below, we describe how cost basis is determined using three primary methods with the same purchase/sell dates for comparison. They are First In, First Out (FIFO), Average Cost and Specific Share ID (Select Lot).
First In, First Out (FIFO): Using the first in, first out method, it's assumed that the first shares purchased are the first ones sold.
Average Cost: Using the average cost method, the shares in the account at the time of the sale are averaged to determine the cost.
The cost of the 20 shares sold is an average of all of the purchase prices. To determine the cost basis using the average cost method, there are three steps:
Step 1. Find the total amount invested.
Cost of all purchases including reinvested dividends = Total amount invested
$5,500 + $240 + $7,000 = $ 12,740
Step 2. Find the average cost of the shares.
Total amount invested / share balance = Average cost per share
$12,740 / 1,020 = $12.49 per share
Step 3. Determine the cost basis for the 20 shares sold.
Average cost of shares x the number of shares sold
$12.49 x 20 = $249.80 (Cost Basis)
Specific Share ID (Select Lot): Using the specific share ID method, the actual shares are specified by the client for sale (including quantity and date purchased).
With this method, you may also select a secondary method that allows us to automatically sell shares in a specific order in case no shares are identified. Review the secondary methods available.
Specific Share ID / Select Lot Secondary Descriptions:
If you select Specific Share ID and do not provide specific shares to be sold, we will sell shares using the FIFO method.
We will select a corporate default method in the event we do not receive an election from you. Keep in mind, our default is not a recommendation and may not be the best choice for your situation. The method you choose for your accounts is an important decision and should reflect what is best for your personal situation as determined by you and your tax advisor.
American Century Investments - Cost Basis Default:
Note: If you choose a method other than Average Cost and acquire shares after January 1, 2012, you must inform us in writing before the time of the redemption.
If you sold non-covered shares (purchased prior to 1/1/12) and we have not provided Average Cost information on your tax form, it may be because we were unable to calculate it. This may be because the records are not available or the shares were transferred. To find the details to calculate your cost basis, log in to your My Account page and review your Transaction History.
The maturity status of your Giftrust determines your cost basis options.
The regulations require investment firms to report sales and cost basis information on accounts held by "S" corporations as defined by the Internal Revenue Code section 1361(a). In 2011, American Century Investments sent a letter and Form W-9 to all corporate account owners and requested they designate their company as either a "C" or an "S" corporation.
If no response was received, we registered the account as an "S" corporation. We do not report sales and cost basis information on "C" corporations.
In the event account shares are transferred to another company (including American Century® Brokerage) and you have not indicated the cost basis method to be used, the receiving company's default will apply regardless of the underlying fund company's default.
If you are a financial professional working with American Century Investments, please visit ipro.americancentury.com for more information.
We are required to report cost basis to the IRS for certain bonds purchased after January 1, 2014. A bond is covered by the reporting requirement if it has a fixed rate, fixed maturity, and fixed payment schedule, even if it is callable by the issuer. At this time, we will not report cost basis to the IRS for more complex bonds or debt instruments issued with less than one year to maturity.
Bond amortization methods are used to account for the difference between a bond's purchase price and its stated redemption value, or par value.1 Bonds purchased above par value carry a premium. Conversely, bonds purchased below par value carry a market discount.2
For bonds purchased at a premium, American Century Brokerage will amortize the premium using the constant yield method. The amount of amortization will reduce your current-year income and cost basis.
For bonds purchased at a market discount, we will accrue the market discount using the constant yield method3. We will not report your accrual as current-year income or adjust your cost basis upward. You will incur a tax liability for the entire accrual when the bond matures or you otherwise dispose of it.
If you would like to keep the default methods listed above, you do not need to take action.
You may elect one or more of the alternatives below:
If you would like to choose an option other than the default methods, please mail a request signed by all authorized owners/signers to:
American Century Brokerage
PO Box 419146
Kansas City, MO 64146
A request to change the default amortization method will apply to all of your covered bond holdings, and it must be received in the year in which the election is to apply.
1 See IRS Publication 550 for additional information.
2 For OID instruments, the discount is the difference between the adjusted issue price and the purchase price.
3 Once the constant yield method has been used to report accruals for bonds purchased at a market discount, it cannot be revoked.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Giftrust is an irrevocable trust designed to be given as a long-term gift to someone other than yourself or your spouse and is not available for an IRA. The Giftrust investment is invested in the All Cap Growth Fund.
Brokerage Services are provided by American Century Brokerage, a division of American Century Investment Services, Inc., registered broker/dealer, member FINRA, SIPC.