In the mid-1990s, Asher Haft's father wanted to bail out of Fidelity Magellan. He had just one problem: insufficient records on which to...
In the mid-1990s, Asher Haft’s father wanted to bail out of Fidelity Magellan.
He had just one problem: insufficient records on which to calculate cost basis. “He bought Magellan in 1987 at the same time he bought Fidelity Puritan, and he reinvested his dividends and capital gains,” says Haft, of Brooklyn, N.Y., who helps his father make investment decisions.
“He had a stack of papers to look through — I’m not even sure it was complete — to try to figure out those reinvestments, and when he called Fidelity, they couldn’t provide the cost basis for the shares that came from reinvested dividends.”
So the elder Haft took an unusual step: He used his Magellan shares instead of cash to make charitable donations. As a result, he got the current, appreciated value of the shares as a tax deduction and never needed to do the math on what his shares cost.
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Of course, he’s got the same problem on his Puritan shares, should he ever want to sell them.
“There have got to be a lot of people like my father who have thrown out paperwork or didn’t keep good records on what they paid,” Haft says. “I wonder if they’re holding on to funds they don’t want anymore because it’s easier than figuring out the taxes.”
The news media focus on how frequently investors trade and make changes to their accounts, but there is little doubt that some investors hang on to funds virtually forever and that figuring out the taxes due on a sale is part of the reason why.
Though death overcomes bad record keeping — because a fund passes to heirs at its value on the date of death, making previous purchase prices moot — no one should have to wait that long to take charge of their funds.
And though the elder Haft came up with a creative solution to the problem with his Magellan shares, charity is not an option for many investors. Pushing to get cost-basis accounting from your fund company is.
The data are crucial because they determine what an investor owes Uncle Sam on a taxable account. Your cost basis is everything you paid for the shares you own. To be accurate, it must include all investments, such as the smaller dollars of any annual distributions that you roll back into the fund.
Without good records, you could wind up like the elder Haft, afraid of winding up on the wrong side of the Internal Revenue Service because you couldn’t provide an exact cost accounting.
The good news is that fund firms have worked hard to improve cost accounting, and many firms have records dating back decades. At Fidelity Investments, for example, spokesman John Brockelman noted that “cost-basis information data tracking back almost 20 years is available to our clients [online], and our phone reps have access to it.”
Fidelity officials have offered cost-basis accounting free to shareholders for about a decade, so Haft never should have had to resort to his unusual strategy with Magellan.
If you know your records are incomplete, fix them when there is no time pressure, no immediate reason to sell. Poor record keeping should never factor into key sell-hold decisions.
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, MA 02025- 0070.