Cost basis is used to calculate capital gains or losses — for tax purposes — when you sell shares. For the most part, cost basis only applies to taxable investing accounts and not to tax-deferred accounts for retirement or education.
On the face of it, cost basis is simple: you purchase a mutual fund share at a certain price and this amount is your cost basis for that share. When the share is sold, the cost basis method you select is used to calculate how much gain (or loss) needs to be reported on your income tax return.
Where cost basis becomes more complex is when you’ve been investing long-term and buying shares through reinvesting your dividends and capital gains and/or making new purchases through one-time and recurring investments. Share purchase prices change over time, which means that original value—the cost basis—of your shares may differ. When you sell your shares, the cost basis method you choose to use determines which shares are sold and impacts the amount of capital gains or losses you’ll have from the sale. Being strategic about which shares you choose to sell can potentially lower your tax bill and save you some money.
Another factor to consider when thinking about cost basis is that the amount of time you’ve owned the shares (the holding period) impacts the tax rate you pay on the capital gains. The holding period is used to determine the tax rate applied to capital gains from the sale of shares:
Thrivent Mutual Funds offers several different cost basis calculation methods. The various cost basis methods indicate the order in which shares are redeemed when you sell your investment. If you don’t choose a cost basis method, we will use the funds default method of average cost.
More information about cost basis also be found in our Cost basis FAQs
IRS form 8937 reports Thrivent Mutual Funds actions impacting the cost basis for shareholder accounts. View previous tax year information here.
Depending on your individual tax situation, you may wish to consult with your tax advisor before selecting a cost basis accounting method and selling shares you own. You can change the cost basis method used on your account; however, once you have sold your shares, you cannot retroactively change the cost basis used for a specific transaction. Also, note that cost basis is not a substitute for performance information for an investment.