27 Oct What will I owe in taxes if I sell this bond fund?

Q. I am 79 years young and since the 1980s, I’ve been investing in a bond fund. I stopped new investments in 2004 and I haven’t redeemed any shares. Every year I get a 1099-Div and I report everything that is needed on my tax return, which includes ordinary dividends and capital gains. If and when I choose to redeem shares, what if any tax liability will I have, if any?
— Investor

A. Thanks for your question. It’s smart to pay attention to any tax liabilities before you sell.

If you sell mutual fund shares, your realized gain equals the difference between the net asset value (NAV) of the shares on the sale date and the cost basis of those shares, said Jodi Cirignano, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

Your tax liability would be calculated on that resulting gain, she said.

“For shares held longer than one year before selling, your profit is considered a long-term capital gain and taxed at a lower rate than ordinary income,” she said.
Cirignano said the NAV of the shares sold is easy to determine, as they are published online at most financial websites a few hours after the end of the trading day, and the fund company will also provide you with a sale confirmation.

The cost basis of the shares is the purchase price of the shares plus any commissions or fees associated with the purchase(s), she said.

A key question is whether or not the cost basis needs to be adjusted, and this depends how you handled income and capital gains distributions from the fund over the years.

“Bond funds periodically distribute interest income and capital gains. These distributions are reported on your tax return each year whether received in cash or reinvested to purchase additional shares in the fund,” she said. “There is no cost basis adjustment if you receive cash distributions. However, if you reinvest the distributions to purchase additional shares, your cost basis in the fund increases by these reinvested amounts.”

Cirignano said it is important to maintain good records for security transactions, especially any trade confirmations documenting the purchase price and date. These records will help you compute your gain or loss on the sale of shares.

The mutual fund company may also have records concerning your cost basis in the fund, she said.

“This information is often found on the monthly statements or may be available if you access your account on-line,” she said. “Mutual funds weren’t required to report cost basis information to the IRS until 2012, but most fund companies have historically maintained this information for their clients.”

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This story was originally published on Oct. 27, 2020.

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