Lowering an Investor's Tax Burden 
Fidelity Investments

As the end of the year approaches and investors inspect their portfolios, many may wonder how they can lessen their losses. Savvy investors, however, know that they can leverage a declining investment to save on their income taxes for the year.

"The benefits of specific share trading can be significant," said Paul Graham, senior vice president, Fidelity Personal Investments. "However, few investors take advantage of the potential tax savings, because trading mutual funds or stocks using specific share identification requires detailed record keeping that many find intimidating and time-consuming. Fidelity's automated, specific share trading functionality streamlines the record keeping process, making it easier for investors to better manage the tax consequences of their trading decisions."

When mutual fund shares are sold, the gain or loss is typically calculated based on the average purchase cost for all of the shares acquired, regardless of the holding period (a cost basis method known as Average Cost-Single Category). By identifying the specific shares to be sold, an investor can use the price he actually paid for a lot of shares and determine the related gain or loss for tax reporting purposes. The smaller the gain or larger the loss, the lower an investor's overall gains and tax burden may be.

How can this be useful for the average investor? The following example shows how an investor trading specific shares of a mutual fund can realize a tax loss of $525, while the same transaction using the Average Cost-Single Category cost basis method creates a taxable gain of $1,443.

Consider a hypothetical customer who owns 2,200 shares of a sample Mutual Fund. Let's suppose he decides to sell 1,050 shares, and that at the time of the sale the price is $13.50 per share.

Date of Purchase/Sale Transaction # of Shares Price per Share Purchase/Sale Price 1/14/01 Initial Purchase 1,000 shares @ $10.00/share = $10,000 12/13/01 Dividend Reinvestment 50 shares @ $11.50/share = $575 1/15/02 Purchase 1,050 shares @ $14.00/share = $14,700 12/12/02 Dividend Reinvestment 100 shares @ $14.00/share = $1,400   Total Purchase 2,200 shares   $26,675 12/31/02 Sale 1,050 shares @ $13.50/share = $14,175

If the sale were based on the Average Cost-Single Category method, the average cost per share would be $12.125 per share. That means that shares being sold would have a cost basis of $12,731.25. (Multiply the number of shares being sold by the average purchase cost per share.) Since the sale of those stocks would be worth $14,175, the investor would create a taxable gain of $1,443.75 from this transaction.

But what if the same investor wanted to lower his taxable gain by making the same trade? By specifying that he wanted to sell the 1,050 shares he bought on January 1, 2002 at $14 per share, the cost basis would be $14,700. (Multiply the number of shares being sold by their actual purchase price.) Instead of having a taxable gain, the investor would have a taxable loss of $525, which could be used to offset any realized capital gains. Any net losses remaining after offsetting gains could then be used to offset ordinary income not in excess of $3,000 (or $1,500 if married filing separately).

Fidelity customers interested in trading specific shares of stocks or mutual funds will find a variety of information on cost basis and gain/loss calculations, loss realization strategies, year-to-date tax information, as well as how tax and cost basis information may be imported into tax preparation software by logging on to Fidelity's Tax Center located at www.fidelity.com/tax.

Fidelity Investments is one of the world's largest providers of financial services, with custodied assets of $1.3 trillion, including managed assets of $732.4 billion as of September 30, 2002.