New 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 Update My Information page. Or print and return the Cost Basis Election Form PDF.

1If the link does not appear, you do not have eligible accounts.

Find explanations and examples below to help you understand how the changes to cost basis will affect you.

 

Cost Basis

The purchase price of a given security. It includes commissions and expenses, if applicable.

 
 

Capital Gain

The difference between the purchase price and sale price of an asset, where the sale price is higher than the purchase price.

 
 

Capital Loss

The difference between the purchase price and sale price of an asset, where the sale price is lower than the purchase price.

 
 

First In, First Out (FIFO)

A method of calculating cost basis in which the shares first acquired are the first to be redeemed.

 
 

Average Cost

A method of calculating the adjusted cost basis in which the investor uses an average of the cost of the shares held in the account at the time of redemption. It assumes you are redeeming the first shares purchased before any others.

 
 

Specific Share

(used for mutual fund accounts, also called Select Lot) - A method of calculating cost basis in which the investor indicates the purchase lot(s) - or the actual shares by quantity and date purchased - that he or she would like to redeem.
 
 

Select Lot

(used for brokearage accounts, also called Specific Share) - A method of calculating cost basis in which the investor indicates the purchase lot(s) - or the actual shares by quantity and date purchased - that he or she would like to redeem.
 

What Is Cost Basis?

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.


When You Purchased the Shares Matters

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:

Non-covered shares
Shares purchased before 1/1/2012
Investment companies are not required to track and report these shares. As a courtesy, American Century Investments provides Average Cost information for non-covered shares when sold (if the data is available). No other methods are available.
Covered shares
Shares purchased after 1/1/2012
As required by the new regulations, we will provide cost basis information for all clients using the method elected by the client or the corporate default if no method is elected.

Purchase date determines if shares are non-covered or covered

Purchase date determines if shares are non-covered or covered


Understand Your Options

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.

Options

Mutual Fund Shares* Brokerage
(Stock, Bond and Option Securities)
Primary Cost Basis Calculation Methods
Checkmark   Average Cost** - The shares in the account at the time of the sale are averaged to determine the cost.
Checkmark Checkmark Specific Share ID (also called Specific Lot) - The shares to be sold are specified by the client.
Checkmark Checkmark First In, First Out (FIFO) - The first shares purchased are sold first.
Checkmark Checkmark High Cost - The shares with the highest cost are sold first.
Checkmark Checkmark Last In, First Out - The most recently purchased shares are sold first.
Checkmark Loss/Gain Utilization - The shares with losses are sold before the shares with gains consistent with the objective of minimizing taxes. For lots that yield a loss, short-term lots will be sold ahead of long-term lots. For gains, long-term lots will be sold ahead of short-term lots.
Checkmark Checkmark Low Cost - The shares with the lowest cost are sold first.
Checkmark High Cost Long Term - The shares with the highest cost held more than 12 months are sold first.
Checkmark High Cost Short Term - The shares with the highest cost held fewer than 12 months are sold first.
Checkmark Low Cost Long Term - The shares with the lowest cost held more than 12 months are sold first.
  Checkmark Low Cost Short Term - The shares with the lowest cost held fewer than 12 months are sold first.
Minimum Tax - Minimize all gains in the short term by selling shares with the highest cost first and lowest cost last.

*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.

Hypothetical Examples

Below, we describe how cost basis is determined using three primary methods with the same purchase/sell dates for comparison.

         First In, First Out (FIFO) Example

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.

Date of Transaction Transaction Amount Price Per Share # of Shares Total Shares
01/15/2012 Purchase by Check $5,500.00 $11.00 500 500
12/15/2012 Reinvest dividend $240.00 $12.00 20 520
01/15/2013 Purchase by check $7,000.00 $14.00 500 1,020
Total amount invested $12,740.00 Total Shares 1,020
05/01/2013 Sell $290.00 $14.50 20 1,000

If 20 shares are sold, they would be the first 20 shares purchased on January 15, 2012. To determine the cost basis:

Multiply the purchase price of the shares x the number of the shares sold
$11.00 x 20 = $220 (Cost Basis)

         Average Cost Example

Average Cost - Using the average cost method, the shares in the account at the time of the sale are averaged to determine the cost.

Date of Transaction Transaction Amount Price Per Share # of Shares Total Shares
01/15/2012 Purchase by check $5,500.00 $11.00 500 500
12/15/2012 Reinvest dividend $240.00 $12.00 20 520
01/15/2013 Purchase by check $7,000.00 $14.00 500 1,020
Total amount invested $12,740.00 Total Shares 1,020
05/01/2013 Sell $290.00 $14.50 20 1,000

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)

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.

Date of Transaction Transaction Amount Price Per Share # of Shares Total Shares
01/15/2012 Purchase by check $5,500.00 $11.00 500 500
12/15/2012 Reinvest dividend $240.00 $12.00 20 520
01/15/2013 Purchase by check $7,000.00 $14.00 500 1,020
Total amount invested $12,740.00 Total Shares 1,020
05/01/2013 Sell $290.00 $14.50 20 1,000

The cost of the shares sold depends on the shares specified. In this example, the 20 shares purchased with the reinvested dividends on December 15, 2012, are sold. To determine the cost basis:

Multiply the price of the shares x the number of the shares sold
$12.00 x 20 = $240 (Cost Basis)

Specific Share ID / Select Lot Secondary Methods

If you select specific share ID as your primary method, you may want to select a secondary method. In the event you do not provide specific shares at the time of your sale, we would use your secondary method. If you select specific share ID, do not provide specific shares at the time of your sale and do not have a secondary method on file, we will sell shares using the FIFO method.

The secondary methods available depend on the type of account you hold, as shown in the table below.

Mutual Fund Shares Brokerage
(Stock, Bond and Option Securities)

Specific Share ID / Select Lot Secondary Descriptions

Checkmark If you select Specific Share ID and do not provide specific shares to be sold, we will sell shares using the FIFO method. First In, First Out (FIFO) - The first shares purchased are sold first.
Checkmark High Cost - The shares with the highest cost are sold first.
Checkmark Last In, First Out - The most recently purchased shares are sold first.
Checkmark Loss/Gain Utilization - The shares with losses are sold before the shares with gains consistent with the objective of minimizing taxes. For lots that yield a loss, short-term lots will be sold ahead of long-term lots. For gains, long-term lots will be sold ahead of short-term lots.
Checkmark Low Cost - The shares with the lowest cost are sold first.

What Happens When No Method Is Selected?

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
Brokerage First In, First Out (FIFO)
Mutual Fund Average Cost

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.


Giftrust®, Corporations and Transfers

Giftrust Clients

The maturity status of your Giftrust determines your cost basis options.

  • Clients in matured Giftrust accounts: You have the same choices for electing a cost basis method as other mutual fund account holders.
  • Clients in non-matured Giftrust accounts: You do not need to make an election. American Century Investments will continue to complete the tax reporting on your behalf as outlined in the trust agreement. The trustee has selected the First In, First Out (FIFO) method for the shares purchased under the trust.

Corporate Clients

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.

Transfer of Shares

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 Link Opens New Window for more information.


Individual Bonds held at American Century® Brokerage

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.

         Learn More about Individual Bond Cost Basis Reporting

Bond Accounting is Unique

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

Amortization Methods for Covered Instruments

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 ratable method. 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.

Alternative Methods Available to You

You may elect one or more of the alternatives below:

  • For taxable bonds purchased at a premium, you may elect that we do not amortize the premium. Your income will not be reduced by the amount of amortization nor will your cost basis be adjusted.
  • For bonds purchased at a market discount, you may advise us to calculate your accrual using the constant yield method instead of the ratable method. Additionally, you may opt that the accrual be included as current-year income. This method is known as inclusion. We will adjust your cost basis upward by the amount of the accrual if you chose the inclusion method.
  • Alternatively, you may make one election to treat a bond premium or discount the same as Original Issue Discount (OID). We will apply the constant yield method to allocate the premium or discount.3 Any bond premium will be amortized. An accrual associated with market discount will be included as current year income. You may not make any other election if you choose the OID method.
  • 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
    P.O. Box 419416
    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. An election to use the constant yield method or the OID method cannot be revoked.

1See IRS Publication 550 for additional information.
2For OID instruments, the discount is the difference between the adjusted issue price and the purchase price.
3See IRS Publication 1212 for additional information.


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.

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.

Brokerage Services are provided by American Century Brokerage, a division of American Century Investment Services, Inc., registered broker/dealer, member FINRA, SIPC.