Mandatory Cost Basis Information
As part of the "Energy Improvement and Extension Act of 2008" (see page 238), mutual fund companies are required to report your cost basis information on IRS Form 1099-B for shares that are acquired and subsequently redeemed on or after January 1, 2012. Invesco is prepared to comply with these new requirements, which complement the cost basis services currently offered by your fund. The information on this page is intended to help answer your questions and inform you on:
Definition of Cost Basis
A mutual fund share is sold at a gain or loss due to the change in value that occurs between the date of purchase and the date of sale. If a mutual fund share is sold above its cost, the difference is a capital gain. If a mutual fund share is sold below its cost, the difference is a capital loss. Shareholders must pay taxes on the capital gain for the year in which the shares were sold; conversely, the shareholder may be able to claim a tax deduction for a capital loss, or use the loss to offset a gain.
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New IRS Cost Basis Requirements
When you sell mutual fund shares purchased on or after January 1, 2012, Invesco will be required to report your cost basis on IRS Form 1099-B. Per section 1012 of the IRS tax code, mutual fund companies must select a default cost basis method for all fund shares. Invesco has selected Average Cost as the default method for your fund. Taxpayers, however, may select a different option from the fund's default method. If the Average Cost method fits your tax situation, then there is no need for you to take action.
Average Cost is the method Invesco has provided to shareholders in the past as an added service. Invesco will continue to provide this service, when available, for shares purchased prior to January 1, 2012; however, this information will not be reported to the IRS. Only cost basis information for shares purchased after January 1, 2012, will be reported to the IRS. To calculate your average cost, the total purchase amount of all shares in the account is divided by the total shares in the account. Shares are depleted in the same order that they were acquired using the average cost of all shares to calculate the cost basis. You can revoke Average Cost and change to another method at any time prior to redeeming your shares by sending a written request. If a redemption has occurred and you later decide to change your cost basis method, the newly elected method will become effective only for shares acquired after the change was made. Shares acquired prior to the change in cost basis method will retain the previously averaged cost per share when calculating the cost basis at the time of sale.
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What This Means for Your Invesco Account
If you owned shares of an Invesco fund prior to the January 1, 2012, effective date, your account shares will be divided into two categories for cost basis purposes. One group will include your noncovered shares and the other group will include your covered shares.
Noncovered shares include shares that were acquired prior to the new cost basis effective date (January 1, 2012). These shares may or may not have Average Cost basis information associated with them. If Invesco has maintained and reported Average Cost information on your account(s) in the past, then we will continue this service for shares acquired prior to the effective date. The costs of your noncovered shares will be maintained and calculated separately from your covered shares. You can use this information as needed for tax purposes. Invesco, however, will only report the redemption transaction for noncovered shares to the IRS and not the cost basis information as it has prior to the new rule.
Shares acquired after January 1, 2012 (i.e., transfers from your broker) in which cost basis information is not provided to the fund are also treated as noncovered shares. Invesco will report the redemption transaction to the IRS but not the cost basis information, since we will not have it available.
Invesco will always deplete your noncovered shares first, except when you instruct us to redeem a specific share lot. When depleting your noncovered shares, Invesco will deplete the shares in the same order in which they were acquired.
Covered shares include shares acquired after the new cost basis effective date (January 1, 2012) and for which Invesco has the cost basis information on record. The cost of these shares will be maintained separately from your noncovered shares. Cost basis information will be reported to you and the IRS for your covered shares. You will receive the cost basis information as well as the gain or loss information for any covered shares you have sold on Form 1099-B and will then use that information when completing your IRS tax return. You should expect to receive your Form 1099-B for the previous year's redemptions prior to February 15th of each year.
When you redeem your covered shares by phone or via our website, you will be asked to confirm the cost basis method to be applied. If redeeming by phone and Average Cost is the current method on your account, this can only be changed to a different cost basis method if requested in writing. When redeeming your covered shares by mail, you will be expected to state the cost basis method to be used on your redemption request. If no method is stated on your request, Invesco will use the method you previously elected for your account's covered shares. If you have not previously elected a cost basis method, the fund's default method of Average Cost will be used for the covered shares in your account.
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Your Fund's Default Method for Cost Basis
After the new cost basis effective date, January 1, 2012, Invesco will use the Average Cost method to calculate the cost of your covered shares unless you elect another method. The Average Cost method averages the cost of all the covered shares in your account and depletes the shares in the same order in which they were acquired. The averaged cost is used to report cost basis associated with the redemption of your covered shares — not the cost basis of the individual shares that were depleted.
If the Average Cost method fits your tax situation, then there is no need for you to take action.
The cost of your covered shares will be averaged effective January 1, 2012. You can revoke the Average Cost method and change to another method at any time prior to redeeming your shares by sending a written request. If a redemption has occurred and you later decide to change your cost basis method, the newly elected method will become effective only for shares acquired after the change was made. This means that all shares purchased prior to the change in cost basis method will retain their averaged cost and shares purchased after the change will use the actual cost at the time of purchase. To determine if another method may be more appropriate for your tax situation, we recommend that you consult your tax advisor.
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Other Cost Basis Methods Available to You
There are several other methods for calculating cost basis including: First-In-First-Out (FIFO), Last-In-First-Out (LIFO) and various versions of specific share identification such as High Cost (HIFO), Low Cost (LOFO), Loss/Gain Utilization (LGUT) and Specific Lot Identification (SLID).
If you wish to use a method other than Average Cost, it is important that you provide your elected method to us before redeeming shares from your account. You can elect or change your cost basis method by accessing your account through our website at invesco.com/us.
Changes to your cost basis method cannot be applied to shares that have already been redeemed. It is important to consider the tax implications and elect a method prior to redeeming shares of your fund.
Shareholders can change their cost basis method at the time of redemption. If you previously redeemed shares using Average Cost and later decide to change your cost basis method, the newly elected method will become effective only for shares acquired after the change was made. Shares acquired prior to the change will retain the previously averaged cost per share when calculating the cost basis at the time of sale.
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How to Obtain Additional Information
If you have questions about this new legislation, please contact your tax advisor or reference the "IRS Cost Basis Reporting Overview and FAQs" located on Internal Revenue Service website at irs.gov.
If you need information about your Invesco account, please contact us by one of the following methods:
- Call our toll free number at 800 959 4246.
- Mail correspondence to Invesco Investment Services, Inc.,
P.O. Box 219078, Kansas City, MO 64121-9078
Hours of Service--Monday-Friday, 7:00am-6:00pm CT. Hours of Service are subject to change due to NYSE holidays or early market closings.
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