Cost Basis Accounting and Regulations

Beginning in tax year 2012, the IRS requires mutual fund companies and brokers to report on Form 1099-B¹ the cost basis of sales of covered² mutual fund shares purchased on or after January 1, 2012. You still are required to calculate and report the gains and losses realized on sales of noncovered³ shares acquired prior to January 1, 2012. Money market funds and tax-deferred accounts, such as IRAs, 529 accounts, and other retirement plans, generally are not impacted by these changes.

If you'd like to use Average Cost for covered mutual fund shares, you don't need to do anything. Your mutual fund account will default to Average Cost for covered mutual fund shares unless you select another method. Average Cost is one of the more popular cost basis methods for mutual funds and requires the least amount of recordkeeping by you or your tax professional.

If you sell or exchange shares after January 1, 2012, we generally will dispose of all noncovered shares first and then the covered shares, in each case in accordance with the cost basis method on your account to the extent possible. For example, if your account method is Average Cost or First In First Out, T. Rowe Price will dispose of all noncovered shares before disposing of covered shares; in each case, noncovered shares will be disposed in a First In First Out order. If you choose to specify individual lots at the time of redemption, we will deplete the shares in accordance with your specification to the extent possible.

While Average Cost is the default method we use for covered shares of mutual funds, you may choose other methods when selling covered mutual fund shares.

To choose your cost basis method, log in to your account and use this online application. If you would like to keep Average Cost as your method, you don't need to do anything, although you may confirm your choice of Average Cost online or by mail or fax. If you do not want to use Average Cost, you may select another method online or by mail or fax at any time. In some cases, you also may select a method other than Average Cost over the phone.

Change cost basis method online

Download the Form to Change Your Cost Basis Method on Covered Shares

If you change your cost basis method from Average Cost to another method after a sale or exchange of covered shares, the cost basis method will apply only to shares purchased after the date that the change request is processed.

We offer the following cost basis methods for mutual funds:

T. Rowe Price defaults all mutual fund accounts to Average Cost, and all covered mutual fund shares when sold will be reported using Average Cost. If you switch out of Average Cost or back into this method, under the cost basis regulations the IRS requires that you provide written instructions to us. To make this simpler, you may do so using our secure online system for your accounts or we can provide a form that you may mail or fax to us.

Average Cost calculates gains or losses on shares sold based on the average purchase price of all shares you own in a mutual fund account. The gain or loss on shares you sell or exchange is the difference between the proceeds of the sale or exchange and the cost basis of the shares.

Total Dollars Invested ÷ Total Number of Shares Held = Average Cost per Share

The Average Cost Single Category method uses the average cost per share of all shares held in the account, and any shares that are sold are considered to be those held longest in the account. T. Rowe Price uses the Average Cost Single Category method as the default method of calculating cost basis for covered and noncovered mutual fund shares, if available, and reporting the cost basis on Form 1099-B. This information is not reported to the IRS for sales of noncovered shares.

The Average Cost Double Category method—which divides shares into two groups: generally those held one year or less (short-term shares) and generally those held more than one year (long-term shares)—was eliminated by the IRS as of April 1, 2011, and may no longer be used.

The following examples illustrate the calculation of cost per share in relation to Average Cost after the cost basis regulations for mutual fund cost basis reporting took effect on January 1, 2012. These examples show only the cost of shares and do not include gain and loss information.

If you purchase covered shares with an Average Cost election or default and then sell any of those shares without changing the method, then all shares purchased prior to the sell date will be locked into Average Cost. New shares may be purchased using a different method.

If you choose a method other than Average Cost at your first covered purchase, covered shares sold will use the method selected or you may change the method at any time prior to sale for any shares.

The following examples illustrate how First In First Out (FIFO) and Last In First Out (LIFO) work after the cost basis regulations for mutual fund cost basis reporting took effect on January 1, 2012.

If you purchase covered shares and choose FIFO (see rules for Average Cost that may apply), then all of the first shares purchased will be the first shares sold.

If you purchase covered shares and choose LIFO (see rules for Average Cost that may apply), then all of the last shares purchased will be the first shares sold.

The following examples illustrate how High Cost and Low Cost work after the cost basis regulations for mutual fund cost basis reporting took effect on January 1, 2012.

If you purchase covered shares and choose High Cost (see rules for Average Cost), then shares purchased with the highest cost will be the first shares sold.

If you purchase covered shares and choose Low Cost (see rules for Average Cost), then shares purchased with the lowest cost will be the first shares sold.

If you purchase covered mutual fund shares and choose Loss/Gain Utilization (see rules for Average Cost), the system evaluates losses and gains and strategically selects lots based on the loss/gain in conjunction with the holding period. This election method depletes lots with losses before lots with gains with the objective of minimizing taxes. For lots that yield a loss, short-term lots will be redeemed ahead of long-term lots. For gains, long-term lots will be redeemed ahead of short-term lots. With favorable long-term capital gains rates, long-term gain lots are given priority over short-term gains to reduce taxes assessed.

Transfers of covered gifted and inherited securities remain covered securities when transferred and accompanied by transfer statement.

S Corporations are eligible for Form 1099-B tax reporting to the IRS beginning with tax year 2012. Brokers must report sales of covered securities that S corporations acquire on or after January 1, 2012.

Beginning with tax year 2011, the IRS requires mutual fund companies and brokers to report on Form 1099-B¹ the cost basis of sales of covered² shares of equities (stocks) purchased on or after January 1, 2011. You are still required to calculate and report the gains and losses realized on sales of noncovered³ shares acquired prior to January 1, 2011.

We provide First In First Out (FIFO)⁴ as the default cost basis method on covered shares for stocks.

Some firms, including T. Rowe Price Brokerage, treat certain equity shares in a dividend reinvestment plan (DRIP) as covered beginning on or after January 1, 2012, while others may treat those shares as covered beginning on January 1, 2011. Beginning with the 2012 tax year, T. Rowe Price Brokerage reports on Form 1099-B the cost basis of sales of covered shares in a DRIP.

You are still required to calculate and report the gains and losses realized on sales of noncovered³ shares acquired prior to January 1, 2011.

Taxpayers are permitted to use the Average Cost method for covered stock in a DRIP for plans requiring reinvestment of at least 10% of every dividend paid in identical stock.

Beginning in tax year 2011, the IRS requires brokers to report on Form 1099-B short sales opened after 2010 in the year in which the short sale is closed.

Dividend Reinvestment Plans

Do all dividends have to be reinvested for securities to qualify as a DRIP?

No. The regulations only mandate that the plan documents of a DRIP require that at least 10% of every dividend paid be reinvested in identical stock.

How is an averaged basis determined for mutual fund or DRIP stock when some of the shares are covered securities and some are noncovered?

The regulations treat mutual fund and DRIP stock that is a noncovered security as being held in a separate account from stock that is a covered security. Because stock is averaged on an account-by-account basis under the cost basis regulations, the basis of shares that are covered securities will be the average basis of only the covered securities and the basis of the shares that are noncovered securities will be the average basis of only the noncovered securities. However, if a broker has accurate basis information for shares that are noncovered securities and makes a "single-account election" for some or all of the shares, the shares subject to the single-account election are treated as covered securities and their basis is averaged with the shares that are covered securities.

The third phase of the Cost Basis Reporting regulations commenced on January 1, 2014. Beginning on that date, T. Rowe Price Brokerage will track and report cost basis information for less complex bonds and options (including warrants and rights) and began applying certain bond amortization methods for applicable bonds purchased on or after January 1, 2014. The IRS issued regulations in March 2015 to modify certain amortization methods used by brokers. This tax information is reported to the IRS on specific tax forms, including Forms 1099-B, 1099-OID, and 1099-INT.

T. Rowe Price Brokerage will track and report cost basis information for all covered securities on Form 1099-B and bond amortization information for applicable bonds on Form 1099-INT, Form 1099-OID, or other forms specified by the IRS, in accordance with the above timelines. As always, you are solely responsible for reporting accurate cost basis information to the IRS on your tax returns when you sell securities in a taxable account.

Accounts for which a Form 1099-B is not generated, such as IRAs and other retirement plans, generally are not affected by these changes.

Cost basis is used for income tax purposes and reflects the original purchase price or value of an asset, such as a security or mutual fund, including fees and commissions, as adjusted for stock splits, return of capital, and other applicable adjustments. Cost basis also is known as tax basis or basis and is used to determine the capital gain or loss of the asset when it is sold or disposed. The capital gain or loss is the difference between the cost basis of the asset and the value of the asset when sold.

There are several methods of calculating cost basis for covered securities. The IRS uses First In First Out (FIFO) as the default method. We use FIFO as the default method for equities, ETFs, bonds, options (including warrants and rights), other securities and DRIPS and Average Cost as the default method for mutual funds. However, other methods can be used.

You do not need to choose a cost basis method until you sell a covered security. However, you may select a cost basis method in advance, if you choose to do so. If so, please review the options below:

There are several bond amortization methods from which to choose for determining income and cost basis. T. Rowe Price's default methods for reporting bond amortization to you and the IRS are:

If you would like to keep the T. Rowe Price default methods listed above, you do not need to take action.
T. Rowe Price Brokerage will use the applicable methods for individual bond holdings acquired and sold after January 1, 2014, or January 1, 2015, as applicable (for certain less complex bonds), and January 1, 2016 (for more complex bonds). If you wish to make a different selection, please contact a representative at 1-800-225-7720.

Subject to certain IRS restrictions (consult IRS Publication 550 and your tax professional), you may change the default amortization selections to your preferred method for all applicable bond holdings acquired on or after January 1, 2014. Please review the table below for additional explanation.

Any methods we have on our record, whether by default or by your election, and any change or revocation about which you notify us with respect to any methods on our record are not binding on the Internal Revenue Service (IRS). You must follow the IRS requirements to make the applicable election on your tax return, and you may need to seek IRS approval for any change or revocation of an election. Please see IRS Publication 550 for more information and consult your tax professional.

While you may elect to treat all interest on a debt instrument (typically bonds) acquired during the tax year as OID under Treasury Regulations Section 1.1272-3 and include it in income on your tax return, the IRS does not allow us to accept such election in calculating basis for debt instruments acquired in 2015 or after. If you choose to treat all interest as OID, you should consult your tax professional. For more information about cost basis reporting requirements and methods, please visit Common Cost Basis Questions for Brokerage.

Cost basis—also known as tax basis or basis—generally is the price paid for an asset or investment, including, if applicable, reinvested dividends and capital gains distributions. Cost basis is used to determine the taxable gain or loss of an asset when it is sold. The capital gain or loss is the difference between the cost basis of the asset and the current market value of the asset when sold or disposed.

Current Market Value - (Original Value + Fees + Commissions + Corporate Actions + Other Applicable Adjustments) = Gain or Loss

The length of time you own the security is called a holding period and determines whether your gain or loss is considered short-term or long-term. Short-term shares generally are held one year or less, and long-term shares generally are held more than one year.

The cost basis regulations use the terms covered and noncovered to distinguish between share sales that mutual fund companies and brokers must report cost basis information to the IRS and those the companies do not need to report, respectively.

Covered shares are mutual fund shares acquired on or after January 1, 2012, and, for certain firms, including T. Rowe Price Brokerage, DRIP shares acquired on or after January 1, 2012. We're required to report the cost basis of any sales or exchanges of covered shares to you and the IRS.

Noncovered shares are mutual fund shares acquired prior to January 1, 2012, and shares without basis information. We are not required to report cost basis information for these shares to the IRS. Certain firms, including T. Rowe Price Brokerage, may treat DRIP shares acquired before January 1, 2012, as noncovered shares.

Covered shares are stock shares acquired on or after January 1, 2011. We're required to report the cost basis of any sales or exchanges of covered shares to you and the IRS.

Noncovered shares are stock shares acquired prior to January 1, 2011, and shares without basis information. We are not required to report cost basis information for these shares to the IRS.

The IRS allows three methods for determining the cost basis—First In First Out (FIFO), Average Cost, and Specific Identification. These methods are explained below. For simplicity purposes, we do not include commissions, fees, corporate actions, and other applicable adjustments in these examples. We recommend that you keep copies of your statements or confirmations to accurately calculate your cost basis.

The FIFO method is a form of Specific Identification (see below) that dictates that the first shares purchased must be sold first. This is the simplest method to use for taxes, but may create the largest amount of income to be taxed, because the longer you own a stock, the bigger your capital gain may be. FIFO is the default method used by the IRS if another method is not chosen. Cost basis using FIFO is calculated as follows:

For example, you purchased 10 shares of Stock A on a monthly basis for 5 years. Assume you bought the first 10 shares at $20 each and in subsequent months the stock rose by a dollar each month. You decide to sell 50 shares. For FIFO, you will use the cost paid per share for each of the first 5 months.

(10 shares x $20) + (10 shares x $21) + (10 shares x $22) + (10 shares x $23) + (10 shares x $24) = $1,100

The Specific Identification method requires the largest amount of recordkeeping, but allows you to manage the amount of income tax owed by identifying the specific shares that may be most beneficial from the tax point of view. For example, you may identify as sold those shares that have been owned for more than a year to avoid a short-term capital gain. This method may help you to pay taxes at the lower rate for long-term investments. Eventually, you may sell the older, and possibly less expensive, shares and be responsible for income tax on that gain—unless they are part of your estate, in which case your heirs may be able to step-up the cost basis to the fair market value of the shares as determined by your estate administrator. Cost basis using Specific Identification method is illustrated as follows:

For example, you purchased 10 shares of Stock A on a monthly basis for 5 years. Assume you bought the first 10 shares at $20 each and in subsequent months the stock rose by a dollar each month. You decide to sell 50 shares. At the time of sale, you have adequately identified a particular set of 50 shares from purchases made in months 16 to 20.

10 shares x ($20 + $15) = $350.00
10 shares x ($20 + $16) = $360.00
10 shares x ($20 + $17) = $370.00
10 shares x ($20 + $18) = $380.00
10 shares x ($20 + $19) = $390.00

Total Cost Basis for the 50 Specific Shares = $1,850.00

In using Specific Identification, the actual cost basis of each stock, bond, or mutual fund purchase is used to calculate gains when shares are sold:

(Purchase Price of the Selected Specific Shares Sold = Cost of Shares Sold)

There are common types of Specific Identification:

Average Cost is our Default Method for Mutual Funds. It is available for Dividend Reinvestment Plans (DRIPs) and Mutual Funds Only.

The Average Cost method, the most commonly used method, is used to determine the average cost per share and generally results in moderate income tax. It is calculated as follows:

Total Dollars Invested ÷ Total Number of Shares Held = Average Cost per Share

Average Cost Single Category
The Average Cost Single Category method uses the average cost per share of all shares held in the account and any shares that are sold are considered to be those held longest in the account. T. Rowe Price uses the Average Cost Single Category method as the default method of calculating cost basis for covered and noncovered mutual fund shares, if available, and reporting the cost basis on Form 1099-B. This information is not reported to the IRS for sales of noncovered shares.

For example, you own 120 shares of a mutual fund purchased in the past at a price of $8.00 per share, for a total cost of $960.00. The fund pays a dividend of $0.40 per share, so you are due to receive $48.00 in dividends, but you reinvest the dividends in the fund. The current share price of the fund is $12.00, so you are able to purchase four more shares with the dividends. Your average cost per share now becomes $8.1290 ($1,008/124 shares owned).

120 x $8 = $960 + (120 x $0.40) = $1,008
120 x $0.40 = $48 ÷ $12 (current price) = 4 shares + 120 = 124 shares
$1,008 ÷ 124 = $8.1290 average cost

Average Cost Double Category
The Average Cost Double Category method—which divides shares into two groups: generally those shares held one year or less (short-term shares) and generally shares held more than one year (long-term shares)—was eliminated by the IRS as of April 1, 2011, and may no longer be used.

Understanding the implications of different cost basis methods on your personal tax strategy is important. There are some key factors you should keep in mind when considering your strategy:

If you reinvest dividends and capital gains, keeping good records of the cost basis is especially important. Distributions to you generally are taxable even if you reinvest them. The reinvested distributions increase the cost basis of your investment, so it is important to keep a record of all investments, including shares acquired by reinvestment of distributions.

For example, you bought 100 shares of a stock for $1,000 last year and reinvested dividends of $100 in Year 1. The following year, you reinvested $200 in distributions. Because reinvested distributions are taxable, even though you didn't have the cash in hand, you have acquired a tax basis in the reinvested dividends. Your tax basis for the stock is now increased to $1,300. If you sell all the shares for $1,500, the taxable gain or income would be $200 ($1,500 - $1,300). If you record the cost basis as $1,000, you'll end up paying more taxes ($1,500 - $1,000 =$500).

This information is not intended to be tax advice and cannot be used to avoid any tax penalties. We recommend that you consult your tax professional or, for further information on tax matters, you may wish to call the Internal Revenue Service at 1-800-TAX-1040 (829-1040). To receive federal tax forms, call 1-800-TAX-FORM (829-3676) or visit the IRS website. Information on individual retirement accounts can be found at IRS Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs) and 590-B: Distributions from Individual Retirement Arrangements (IRAs).

The legislation, enacted in October 2008 as part of the Emergency Economic Stabilization Act, requires the financial services industry to report to the IRS on Form 1099-B cost basis of securities sold. In addition, the regulations require the reporting of the customer's adjusted basis in the securities and whether any gain or loss on the sale is short-term or long-term. These changes began to take effect beginning in 2011 and will be phased in through 2016 as follows, subject to any changes by the IRS. This applies to securities purchased on or after these dates (known as "covered securities"):

A "covered" security, or "post-effective" security, is any security purchased according to this schedule: stocks and, for certain firms, DRIP shares purchased on or after January 1, 2011; mutual funds and, for T. Rowe Price Brokerage, DRIP shares purchased on or after January 1, 2012; less complex bonds and options purchased on or after January 1, 2014; and complex bonds and options purchased on or after January 1, 2016. These securities are known as post-effective securities, or covered securities, and are subject to the cost basis reporting regulation. Securities purchased prior to these effective dates are known as pre-effective securities, or noncovered securities, and are not subject to the cost basis reporting regulation.

Cost basis information and reporting will not be retroactive to these noncovered shares. T. Rowe Price will not be responsible for reporting cost basis information to the IRS for noncovered or pre-effective securities. Cost basis information that you may receive today for noncovered securities will not change; what changes is the addition of tracking and reporting for covered securities to the IRS.

Mutual fund shares purchased prior to January 1, 2012, are noncovered securities. Cost basis information and reporting will not be retroactive for these noncovered securities. T. Rowe Price will not be responsible for reporting gain/loss information to the IRS for noncovered or pre-effective securities. Cost basis information that you receive today for noncovered securities will not change; what will change is the addition of tracking and reporting for covered securities to the IRS.

If you haven't made any changes to your method, then you don't have to do anything. Your mutual fund account will be defaulted to Average Cost.

According to the cost basis reporting regulation, you may elect a cost basis method at any time prior to the sale of the covered security. However, if you chose the average cost method for a particular mutual fund and wish to change that method, your change may be prospective (if you have already sold covered shares of that mutual fund) or retroactive (if you have not yet sold any covered shares of that mutual fund). You should consult your tax professional on such change. The average cost method is available only for calculating cost basis on mutual fund shares and covered shares held in dividend reinvestment plans.

For further information on tax matters, you may wish to call the Internal Revenue Service at 1-800-TAX-1040 (829-1040). To receive federal tax forms, call 1-800-TAX-FORM (829-3676) or visit the IRS website. Information on mutual fund tax matters is available in IRS Publication No. 550, and information on individual retirement accounts can be found at IRS Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs) and 590-B: Distributions from Individual Retirement Arrangements (IRAs).

You may revoke an Average Cost method election or default for previously purchased covered shares before the first sale of the covered shares. This revocation must be in writing, which can be accomplished through our online application or by mailing or faxing a Cost Basis Method Change form to us. If you make a redemption of covered shares, your right to revoke the method is terminated. Please note that if you are subject to the account service fee, the fee payment from a sale of shares in the account would constitute a redemption and terminate your right to revoke Average Cost for the account.

You may change the Average Cost method election or default for covered shares you purchase in the future (prospectively) at any time. This change must be in writing, which can be accomplished through our online application or by mailing or faxing a Cost Basis Method Change form to us.

T. Rowe Price currently provides Average Cost on sales of noncovered mutual fund shares for informational purposes. By choosing Average Cost as the default method, your account method can remain consistent with your current account information. Average Cost is one of the more popular cost basis methods for mutual funds and requires the least amount of recordkeeping by you or your tax professional.

We don't have any literature to send you on the regulation. Here are some resources you may find helpful. For more information about the regulation, visit IRS Third Party Information Reporting.

Wash sale rules apply to mutual funds. If you sell shares at a loss, you cannot claim the loss if you purchased other shares in the same fund or a substantially identical fund within a 61-day period surrounding the sale. This period includes the day of the sale, 30 days before the sale, and 30 days after the sale. The disallowed loss is added to the basis of the purchased shares that resulted in wash sales.

For Form 1099-B reporting, we are only required to report to the IRS wash sales on covered securities that have the same security identifier (such as CUSIP) and are held in the same account. You are responsible, however, for identifying and reporting all wash sales for all securities held in all of your accounts. For noncovered securities, we adjust gain/loss information for wash sales you made before the end of the calendar year and report such information to you (but not the IRS). For more details, see IRS Publication 550. Please consult a tax professional. You should note that you are ultimately responsible for the accuracy of your tax return.

For shares purchased prior to 2012, T. Rowe Price will not report cost basis information to the IRS for mutual funds. Clients may choose any method permissible under IRS regulations and are responsible for complying with IRS regulations in reporting mutual fund transactions on their tax returns. As a service, T. Rowe Price provides average cost basis information when possible. Beginning with the 2012 tax year, T. Rowe Price began to report to the IRS on Form 1099-B cost basis information on covered mutual fund shares sold. In conjunction with such reporting requirement, we accept written requests to change cost basis method in compliance with the IRS regulations. Access the T. Rowe Price forms to request your cost basis for covered and noncovered shares.

Form 1099-B with gain/loss information is prepared for covered securities only. If your transaction includes the sale of covered and noncovered securities, you will not see the gain/loss information for the noncovered securities on Form 1099-B. The gross proceeds (but not the gain/loss) for the sale of noncovered securities are reported on a separate section of Form 1099-B.

Moreover, the loss may be adjusted under the IRS 30-day wash-sale rule, which states that if you sell shares at a loss, your loss deduction will be deferred if you purchased other shares in the same or substantially identical security or mutual fund within 30 days before or after the sale. You should also note that we are only required to apply the wash-sale rule on an account-by-account basis, but you are required to apply such rule across all of your accounts. If you believe that the gain/loss amount is incorrect, please contact us.

Yes. When trading authority has been granted to another person on your account, the authorized person has full privileges to buy or sell at their discretion on your behalf, including choosing a cost basis method.

Brokerage customer responsibilities have not changed. You should continue to ensure that the correct cost basis information is reported on your tax returns. The information we provide on Form 1099-B can be different from what you are required to report on your tax returns because we are permitted, under the IRS cost basis regulations, to ignore certain complicated tax rules in determining your cost basis information, while you may have to take into account those rules. Please consult your tax professional.

Cost basis information and reporting is not retroactive for noncovered securities. T. Rowe Price will not report gain/loss information to the IRS for noncovered or pre-effective securities. Cost basis information for noncovered securities will not change; what will change is the addition of tracking and reporting for covered securities.

For more information, visit Common Cost Basis Questions for Brokerage.

Yes. If gifted or inherited securities were covered in the account of the donor or decedent, they remain covered upon receipt by the donee or heir. Covered securities transferred by gift or inheritance must be accompanied by a transfer statement that indicates that the gifted or inherited securities are covered securities. In the case of inherited securities, the transfer statement must also report the date of death and the stepped-up basis as of the date of death or as reported to the broker by the authorized representative of the estate. In the case of gifted securities, the transfer statement must include the donor's adjusted basis, the donor's original acquisition date, the date of the gift, and the fair market value of the gift on that date. The transferor is only required to compute the fair market value of the securities on the date of the gift if the value is readily ascertainable at the time of the transfer.

Here are some terms that may be helpful in understanding the cost basis regulations.

Affirmative Election of Average Cost - Taxpayer chooses the Average Cost method for his/her mutual fund account; taxpayer must elect Average Cost in writing or electronically.

Average Cost - Method of calculating the cost basis of mutual funds by dividing the total cost of shares by the total number of shares owned in a fund. This number (the per share average cost basis) is then multiplied by the number of shares sold and compared to the actual sale amount to compute a gain or loss. Beginning in 2012, taxpayers who elect to use average cost will compute separate averages for fund shares held in different accounts. Taxpayers are permitted to average the basis of mutual fund shares in one account but not average them in another account. Also, unless the fund or broker elects otherwise, taxpayers will compute a separate average for fund shares in an account that are covered securities and a separate average for fund shares in an account that are noncovered securities.

Bond Amortization - As used here for cost basis reporting, bond amortization refers to the applicable tax accounting method that gradually and systematically reduces the discount or premium incurred in the acquisition of a bond over the remaining life of the bond (until the bond's maturity).

Cost Basis (or Tax Basis or Basis) - The original purchase price or value of a security or mutual fund, including fees and commissions, and adjusted for stock splits, return of capital, and other applicable adjustments. Cost basis is used for income tax purposes to determine the capital gain or loss of the asset when it is sold or disposed. To calculate a gain or loss on the sale of a security, subtract the cost basis from the price at which you sold the security (sales proceeds):

Sales Proceeds - (Original Value + Fees + Commissions + Corp. Actions + Other Applicable Adjustments) = Gain or Loss

Cost Basis Method - A method for determining the shares and the cost of such shares associated with a sale to determine the gain or loss amount to be reported by a taxpayer.

Covered Shares (Post-Effective Shares) - Shares acquired on or after IRS-designated effective dates (January 1, 2011, for equities - some exceptions may apply; January 1, 2012, for mutual funds, DRIPs, and certain exchange-traded funds (ETFs); January 1, 2014, for less complex bonds, options, and other applicable securities as defined by the IRS); and January 1, 2016, for complex bonds and options that are subject to cost basis reporting on Form 1099-B.

Default Method - Cost basis method selected by the firm, which the firm may use to report covered shares if the shareholder does not elect a method; failure of taxpayer to notify a firm of an election of a method does not constitute an election of a method.

Dividend Reinvestment Plan (DRIP) - An investment plan offered by a corporation or a broker allowing shareholders to automatically reinvest cash dividends and capital gains distributions in more shares of the same stock, often without commission, instead of receiving the distribution in cash.

Form 1099-B - An IRS tax form provided by a broker or mutual fund company to the IRS and the client (payee) to report certain information on security transactions. The information from Form 1099-B may be used for preparing IRS Form 1040, Schedule D.

IRS One-Year Rule - This rule states that that taxpayer is allowed to revoke default method by the earlier of either the 1st sale or 1 year after election or after being informed of default average cost. Financial firms may extend the one-year period. T. Rowe Price will not use the 1-year rule; T. Rowe Price permits revocation of the average cost method at any time as long as no sale of fund shares has occurred.

Lot Depletion/Depletion Sequence - The order in which tax lots (shares) are sold or drawn down from an account, for example, the first shares purchased are the first shares to be depleted. When the Average Cost method is chosen, your shares are depleted on a FIFO basis.

Noncovered Shares (Pre-Effective Shares) - Shares acquired prior to IRS-designated effective dates and shares without basis information.

Prospective Change of Average Cost Election - If a taxpayer's account was defaulted to Average Cost for covered shares and a redemption has occurred, the taxpayer may choose a different method on the account for shares purchased after the redemption.

Revocation of Average Cost Election - Taxpayer may change a defaulted or elected Average Cost method in writing or online to another method prior to the first sale or transfer of these covered shares. Making a redemption on covered shares terminates the right to revoke the method. The account service fee, assessed by share redemption, counts as a redemption. Taxpayer may change cost basis method on future purchases, no matter what cost basis method is chosen.

Disallowed Loss - Loss from a security sale cannot be deducted on the tax return. This can result from a wash sale, which occurs if an investor sells shares at a loss and purchased other shares in the same or substantially identical security within 30 days before or after the sale.

Fair Market Value (FMV) - Fair market value is generally the price that an asset would command on the open market or in an arm's length transaction.

Gifted or Inherited Lot - A share or shares that were transferred as a gift or through an inheritance.

Gift Transfer - The transfer of a security to another as a gift. If the stock has appreciated in value, the holder can avoid paying the capital gains tax by giving it as a gift. Gift tax, however, may apply.

Long-Term Gain or Loss - Realized profit or loss on the sale of a security that generally has been held more than one year.

Short-Term Gain or Loss - Realized profit or loss on the sale of a security that generally has been held one year or less.

Tax Lot - Securities held in an investment portfolio identified by their dates of purchase and/or cost basis.

Unknown Cost or Shares - Shares of a security within an account for which the broker does not know the cost or acquisition date. The security is then deemed noncovered, even if purchased after the effective date.

Wash Sale Rule - Investor who sells shares at a loss may not claim the loss on his or her income tax return if the investor purchased other shares in the same or substantially identical security within 30 days before or after the sale.