| Bifurcated Average Cost Basis for Mutual Funds |
What the heck is bifurcated average cost basis?
It is an entirely new concept that was developed in response to the IRS requirement that brokers and mutual fund sponsors keep track of the cost basis of mutual funds. All shares purchased after the effective date of January 1, 2012, are considered "covered" under the new law. The trade lots (meaning purchase dates and amounts)
of all your mutual fund purchases are separated (bifurcated) into buckets of "covered" and "non-covered" shares and average cost is calculated separately for each bucket.
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How does this cost basis method differ from normal average cost basis? With the regular average cost basis method, the cost of every share owned is recomputed with a new average after each new purchase. In contrast, with the bifurcated average cost basis method, the average cost of the "non-covered" shares (those purchased prior to January 1, 2012) is frozen, and these shares are not included in the recalculation when new shares are purchased.
The simplest way to implement this method (or to double check on your broker's calculations) is to use our average cost basis worksheets and use two separate worksheets: one for all shares purchased prior to January 1, 2012, and the second for all shares purchased after that date.
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