Hello folks. First time poster here and beginner investor. I inherited some mutual funds (non-IRA's) and I've been having an issue trying to understand why the cost basis is varying on each fund before the date of death. With a few funds I see the stepped up date of death basis / date of death valuation matches throughout all the purchases on the fund leading up to date of death. That makes sense from what I've read. However, many of these funds initially show the cost basis correctly stepped up to the date of death, but then they either start going slightly up or down in value on subsequent purchases / reinvestments of dividends still before the date of death. I thought the cost basis would remain the same up to and including the date of death?
I also see after the date of death more shares produced from dividends on different funds. Instead of seeing the market value on the date of acquisition of those shares as the cost basis, I'm still seeing the date of death value as the cost basis, or something slightly higher or lower. I thought there would be no step up in basis on purchases or acquisitions made after date of death? Basically I thought your basis is whatever the purchase price / acquisition price was when you acquired the additional shares.
I have received a message from the investment company but it is confusing. *"The client holds both covered and non covered positions. As a result the client will receive two average cost basis prices. One for their covered lots and one for their non covered lots.*
*In regards to the differential in pricing, although all shares held on the date of death have been stepped up to the same pricing per that security pricing on the day, the client has received additional shares through dividend reinvestments which are altering the overall average pricing for covered lots."*
I googled covered and uncovered shares. I thought that would affect reporting of the cost basis to the IRS? I couldn't find any info on covered and non-covered positions.
Regarding the differential in pricing, I'm only following part of what he says. I don't understand why newer shares purchased through dividend reinvestments would raise or lower the cost basis of shares that were owned before the date of death. I believe those subsequent purchases would have their own cost basis. I think when shares are sold the firm would ask which group of shares you want to sell, and those shares stand alone with their own value and cost basis. My understanding that every purchase or even acquisition of more shares through dividend reinvestment would have its' own cost basis. And if the dividends and share purchases were acquired before date of death, then they would be stepped up like any other share.
I found this quote on Reddit through a lucky google search:
[https://www.reddit.com/r/dividends/comments/1jcwws1/how\_do\_you\_handle\_tracking\_your\_true\_cost\_basis/](https://www.reddit.com/r/dividends/comments/1jcwws1/how_do_you_handle_tracking_your_true_cost_basis/)
"Your broker is required to track this for all shares acquired after 2010.
If you reinvest dividends, each reinvestment looks to the IRS like a separate investment, with a separate cost basis equal to how much dividend was invested. It does not change the cost basis on the shares bought with the original investment.
For example, if you buy 100 shares and reinvest quarterly dividends for a year, the way the IRS sees it, you have 5 separate investments, each with their own cost basis. One will be 100 shares (the original investment), and 4 will be smaller (the dividend reinvestments)"
I'm pretty confused and would be grateful if someone could help explain to me what is going on. Thank you for reading my long post.