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Cost Basis Summary
This section provides a summary of the new cost basis rules and how they impact your account.


Frequently Asked Questions (FAQ)
Refer to this section for answers to the most commonly asked questions about the new cost basis regulations.

IRS Resources
Refer to this section for a link to the IRS publication that contains final regulations on cost basis reporting and other helpful information.

The information on this website is not intended to be a complete discussion covering all of your income tax requirements, and should not be relied upon as a source of professional advice. If you require specific information concerning your individual tax situation or require assistance determining which cost basis reporting method is appropriate for you, please consult your tax advisor.

Cost Basis Summary

Background
As of January 1, 2012,  regulations require that mutual funds track and report cost basis information to the IRS for fund shares purchased after January 1, 2012. The rule requires fund companies to report to the IRS certain information such as date of acquisition, proceeds and cost basis on covered shares sold or exchanged in any taxable (non-retirement) account and any account owned by an S corporation. The rule defines the shares purchased after January 1, 2012 as covered shares and the shares purchased before January 1, 2012 as non-covered shares.

Generally, cost basis is the original price that you paid for your shares, including reinvested dividends and capital gains, and is used to determine the gain or loss on the shares you redeem or exchange. If you redeem or exchange covered shares in your account, the cost basis reporting to the IRS will be included on Form 1099-B. Mutual funds are not required to report cost basis information to the IRS for non-covered shares.

Your cost basis election impacts the cost basis information that will be reported by Oakmark to the IRS and the taxable gains or losses reported by you on your income tax return. Please consult your tax advisor for information applicable to your specific tax situation.
 

Cost Basis Election
The Oakmark Funds use Average Cost as the default method for calculating and reporting the cost basis of your covered shares. However, you may choose any of the other available cost basis reporting methods. Please refer to question 5 in the FAQ section below for the list of cost basis options.

The election you make will apply only to covered shares. Unless you select SLID as your cost basis method, when shares are redeemed or exchanged, all non-covered shares will automatically be depleted before the covered shares, starting with the oldest shares first.

You may always change your cost basis election prospectively for covered shares from the date of acquisition going forward. If you have not elected a cost basis method or have defaulted to Average Cost, and there have not been any redemptions or exchanges of covered shares from your account, you may revoke your prior election and retroactively elect a different cost basis method for your covered shares. However, once you sell covered shares using the Average Cost method, you may not change your cost basis method on existing covered shares in your account. For all other cost basis methods, you may change your cost basis method on existing covered shares at any time.

The regulations require that a request to change your cost basis method to or from Average Cost be made in writing. This can be accomplished by logging into your account online and changing your Average Cost election or by sending us a letter of instruction.

Frequently Asked Questions

  1. What is cost basis?
    Cost basis is generally the original price that you paid for your shares, including reinvested dividends and capital gains, and is used to determine gains and losses on any shares you redeem or exchange in a taxable (non-retirement) account. Mutual funds are required to report cost basis for taxable (non-retirement) accounts and accounts owned by S corporations to the IRS and taxpayers via Form 1099-B.
     
  2. What are covered shares? What are non-covered shares?
    Covered shares are the mutual fund shares you purchase on or after January 1, 2012. Non-covered shares are the mutual fund shares you purchased prior to January 1, 2012. The rule does not require mutual funds to report cost basis information to the IRS for non-covered shares.
     
  3. Am I able to change my election?
    You may always change your cost basis election for covered shares from the date of acquisition going forward. If you have elected or defaulted to Average Cost, and there have not been any redemptions or exchanges of covered shares from your account, you may revoke your prior election, and retroactively elect a different cost basis method for your covered shares. However, once you sell covered shares using the Average Cost method, you may not change your cost basis method on existing covered shares in your account. For all other cost basis methods, you may change your cost basis method on existing covered shares at any time.
     
  4. How can I view or change the cost basis method for covered shares in my account?
    You may view or change your cost basis method by logging into your account, selecting Update Cost Basis Method from the Cost Basis tab or by calling an Investor Service Representative at 1-800-OAKMARK (625-6275). Requests to change your cost basis method to or from Average Cost must be made in writing. This can be accomplished by logging into your account online and changing your Average Cost election or by sending us a letter of instruction.

  5. What cost basis methods are available?
    Cost basis methods recognized by the IRS include Average Cost (ACST); First-In, First-Out (FIFO); and Specific Lot Identification (SLID). The Oakmark Funds can automate several tax conventions, which are essentially forms of SLID, to achieve certain taxable outcomes, and these are described below. You should consult your tax advisor for questions regarding which method is appropriate for you.

    Average Cost (ACST) – A standing order to sell the oldest shares in the account first and report their average cost. Average Cost is calculated by adding up the cost of all shares in the account and dividing by the total number of shares in the account. The average cost per share is applied to the total number of shares sold to determine the cost basis of those shares being sold. The average cost of covered shares is calculated separately from non-covered shares as if they were in two separate accounts.


    First-In, First-Out (FIFO) – A standing order to sell the oldest shares in the account first. The actual cost and dates of purchase for those shares are reported.

    Last-In, First-Out (LIFO) – A standing order to sell the newest shares in an account first. The actual cost and dates of purchase for those shares are reported.

    High-Cost, First-Out (HIFO) – A standing order to sell shares purchased at the highest cost first. The actual cost and dates of purchase for those shares are reported.

    Low-Cost, First-Out (LOFO) – A standing order to sell shares purchased at the lowest cost first. The actual cost and dates of purchase for those shares are reported.

    Loss/Gain Utilization (LGUT) – The Loss/Gain Utilization method is used to deplete the shares with the largest losses first and the shares with the largest gains last. The actual costs and dates of the purchases for those shares are reported.  Please see question 6 below for a more detailed explanation of LGUT.

    Specific Lot Identification (SLID) – The shareholder will be required to designate the specific shares to redeem when placing their redemption request. A secondary accounting method is required for use if specific lots are not identified in the redemption request or the lots chosen are no longer available. Please note that Average Cost cannot be used as a secondary accounting method.

  6. Can you explain in more detail the Loss/Gain Utilization method?
    The Loss/Gain Utilization method is used to deplete the shares with the largest losses first and the shares with the largest gains last. This will be done on a per-share basis in each tax lot. The following is the order in which the tax lots will be depleted:

          •  short term losses (in descending order, greatest loss per share to least loss per share)
          •  long term losses (in descending order, greatest to least)
          •  short term no gain or loss
          •  long term no gain or loss
          •  long term gains (in ascending order, least gain per share to most gain per share)
          •  short term gains (in ascending order, least to most)
          •  lots with unknown cost in FIFO order (by acquisition date) and then least share count order

  7. What cost basis method is best for me? How can I decide?
    It depends on your personal tax situation. You should consult with a tax advisor to decide which option is best for you.

  8. What is the purpose of the cost basis method I choose?
    Your cost basis election impacts the taxable gains or losses that will be reported by Oakmark to the IRS and reported by you on your income tax return. Your election also affects the order in which covered shares are depleted from your account.  As a general rule, unless you select SLID as your cost basis method, non-covered shares will be redeemed prior to your covered shares.

  9. If my account contains both covered and non-covered shares, which shares will be depleted first?
    When you sell shares in your taxable Oakmark account, we will automatically deplete any non-covered shares first, unless you specifically identify share lots you wish to sell using the SLID method.  Additionally, if both covered and non-covered shares are redeemed, two different cost basis calculations for the same redemption may appear on Form 1099-B.

  10. Am I able to change the cost basis method used for a sale of shares after it has occurred?
    Under current IRS regulations, you are not allowed to change the cost basis used for a sale after it has occurred.

  11. What is my cost basis for an investment I received as a gift?
    Generally you must use the donor's basis. The basis for loss is either the donor's basis or the fair market value of the shares at the time of the gift, whichever is lower. In some cases, there is neither a gain nor a loss if the sales proceeds are greater than the fair market value on the date of the gift and less than the donor's basis.  Please complete the Change of Registration Form to process a gift of shares.

  12. How has the Form 1099-B changed from prior years?
    Legislation requires that the Form 1099-B indicate if the gain or loss from an exchange or redemption is short-term or long-term, and the amount of any loss disallowed under IRS wash sale rules. The form will include cost basis information for sales of covered shares.

If share cost information is available, the form may also include cost basis information for sales of non-covered shares. The cost basis for non-covered share redemptions will be reported to you, and not to the IRS, using the “average cost” method.  It will continue to be your responsibility to calculate and report to the IRS any gains or losses on such shares sold using average cost or any other cost basis method you may choose.

IRS Resources

For specific tax information regarding the cost basis regulations or to find IRS Form 8949, please call the IRS at 1-800-TAX-1040 or visit their website. Links to the IRS website and to Form 8949 are included below.

Contact Information

If you have questions regarding cost basis, please contact us at  1-800-OAKMARK (625-6275), Monday through Friday between the hours of 8 a.m. and 6 p.m. Eastern Time.
 

The information on this website is not intended to be a complete discussion covering all of your income tax requirements, and should not be relied upon as a source of professional advice. If you require specific information concerning your individual tax situation or require assistance with determining which cost basis reporting method is appropriate for you, please consult your tax advisor.

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Date of first use: January 24, 2013.

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