How do I calculate loss from sold mutual funds?

Q: I recently sold some mutual funds at a loss. How do I calculate my loss - from the point when I bought them (2000), or do the day I sold them (Dec. 31, 2003)? - John, South Boston

The following answer was provided by Mark Misselbeck, CPA, Levine Katz Nannis & Solomon PC, Needham.

A: The date of purchase (trade date) is the date of acquisition (purchase) that you should use to determine the holding period and the cost is what you paid, including any commissions or fees.

If you have not reinvested your dividends from the mutual fund (assuming that there were dividends paid during the period that you held it), then you're done. If you opted to reinvest the dividends, then you need to decide which of four methods you want to use to determine your cost for the shares sold.

The usual method (if you don't elect another method) is first-in-first-out - that is, the first shares you bought are the first shares you sold, eating into each block of shares purchased until you have accounted for enough shares from successive purchases to "cover" the shares sold.

The next method is to specify to the selling agent the specific block (or blocks) of shares from which you are selling shares.

The other two methods are; 1.) The "average cost method", where you average your total cost of all of your shares purchased over the total number of shares held, then multiply the resulting average cost by the number of shares sold; and 2.) The "double averaging" method - you need to break your holdings out into those that were held long term (more than 1 year) and those that were held short term, then average the cost for the different batches - in using this second method, you must again specify to the selling agent whether you are selling from the short or long term blocks of shares AND the agent must then confirm, in writing to you, the instructions that you have given them. For more information, consult IRS Publication 564 (call 1-800-829-3636 to obtain a free copy).