News & Commentary

New Tax Rules For 2012: Cost Basis
January 26, 2012

Beginning in 2012, new regulations require mutual funds to provide cost basis information to shareholders and the Internal Revenue Service (IRS). We wanted to make you aware of these regulations and how they will affect the tax reporting on your taxable Harbor Funds accounts. What is changing?

Harbor Funds is not currently required to send cost basis information to the IRS when you sell shares in your account. Beginning with tax reporting for calendar year 2012, Harbor Funds will be required to report cost basis information to you and to the IRS on Form 1099-B for shares purchased after January 1, 2012. Shares purchased after January 1, 2012 are called "covered" shares. Shares acquired prior to January 1, 2012 are called "noncovered" shares and cost basis information for noncovered shares will not be reported to the IRS. Covered and noncovered shares will each have their own cost basis.

What is "cost basis" and how is it used?

Cost basis is generally the purchase price of your shares, adjusted for reinvested dividends and capital gains distributions. Cost basis is used to determine any gain or loss when your shares are sold. The gain or loss is the difference between the value of your shares when sold and the cost basis of your shares.

Harbor Funds currently offers one cost basis method for shareholders – average cost. The average cost method calculates your gain or loss on shares sold based on the average cost basis of all of the shares you own. We have been providing average cost information to you for informational purposes on your Form 1099-B for several years.

What do I have to do as a result of these changes?

You do not need to take any action if you wish to continue to use average cost as the cost basis method for your shares. Average cost will continue to be the primary cost basis method used by Harbor Funds for all shareholder accounts unless a shareholder makes an affirmative election to select a different cost basis method.

What if I want to select a different cost basis method for my account?

Under the new regulations, you can select a different cost basis method for your Harbor Funds accounts. You can select a different cost basis method for your account in one of three ways:

  1. login to your account and follow the menu steps to select a different cost basis method
  2. download the Cost Basis Election Form and return that form to us by mail or by fax
  3. contact us at 800-422-1050 and we would be happy to mail you a hard copy of the Cost Basis Election Form for you to complete and return to us.
What cost basis methods are available to me?

Harbor Funds is offering the following cost basis methods for you to choose from:

  • Average Cost – Calculates the cost of shares in an account by averaging the cost of all purchases made after January 1, 2012. Shares will be redeemed in a first-in first-out order. This is Harbor Funds' primary cost basis method.
  • First-In First-Out – Shares acquired first in the account are the shares sold first.
  • Last-In First-Out – Shares acquired last in the account are the shares sold first.
  • High Cost – Shares acquired with the highest cost per share are the shares sold first.
  • Low Cost – Shares acquired with the lowest cost per share are the shares sold first.
  • Loss/Gain Utilization –Shares with losses are sold before shares with gains, consistent with the objective of minimizing current taxes. For shares that are sold at a loss, shares owned one year or less (short-term) will be sold before shares owned more than one year (long-term). For shares sold at a gain, shares with long-term gains will be sold before shares with short-term gains. Because long-term gains tax rates are generally favorable, long-term gains are given priority over short-term gains to minimize the current tax liability.

Please keep in mind that each of these cost basis methods applies only to "covered shares", which are shares purchased after January 1, 2012.

Since each shareholder's tax situation is different, you may want to consult your qualified tax advisor for guidance on your cost basis selection.

If you have any questions, please do not hesitate to contact us at 800-422-1050. Our Shareholder Services Representatives are available Monday through Friday, 8 a.m. to 6 p.m. Eastern time, to answer your questions.