Negative Cost Basis for a Sold Investment

[B2B_Investing]

Aloha Mark,

I am eliminating a multi-year held position (mutual fund) in an established account. The account value is still positive but the basis is recording as negative. The account only has buy, sell and reinvestment of Cap Gain transactions. All of the transactions look correct. Where should I start troubleshooting?

Jason

[Mark]

Hi Jason,

Which type of basis has a negative value? There is both a "tax" basis, and a FM specific "OOP" (Out Of Pocket) basis. The OOP basis is your overall break-even point. The OOP basis goes down when you receive a distributed distribution, and is un-changed for a reinvested distribution. Your tax basis is un-changed for a distributed distribution, but goes up with a reinvested distribution.

There is also a historical and current version of the OOP basis. The historical version looks over the entire history of your investment. The current version just calculates for the currently owned shares. If you've sold for more than you've paid in the past your historical OOP may very well be negative.

You might put whatever basis type you're investigating into a Custom report, and then set the ending date of the report at an early point, making sure it is correct, and then moving the date forward until you find any possible problem.

[B2B_Investing]

Mark,

The investment is in a tax free account; this is checked in the portfolio properties where the investment is held. I ran a custom report and the OOP basis and the tax basis assigned are different.

When I right click the investment select graph as Cost - Value, the cost basis drops negative. Is this the OOP basis?

When I run the portfolio performance report the beginning value, contributions, withdrawals, and ending value match the transaction data and matches the tax basis.

It appears that the tax basis is correct but the OOP is not. What could have caused this? While I know I can enter the OOP information Transfer In, I do not have any such transactions here. Thoughts?

Jason

[Mark]

Hi Jason,

Yes, the cost plotted in the graphs is your OOP basis. You can plot either current or historical OOP basis by toggling the option "Graphs / Options / Historical Cost".

Which OOP and tax basis fields exactly are you looking at in a Custom report. There are several...

The OOP cost basis can definitely be different than your tax cost basis. First off, if you're looking at historical OOP this is different than your current tax basis. If you are looking at both the current OOP and current tax basis, these can differ because of distributions:

The OOP basis goes down when you receive a distributed distribution, and is un-changed for a reinvested distribution. Your tax basis is un-changed for a distributed distribution, but goes up with a reinvested distribution.

The OOP is a Fund Manager figure, and is meant to help you see your overall break even point. You can read the definition in the online help here:

https://www.fundmanagersoftware.com/help/def_oop.html

[B2B_Investing]

Aloha Mark,

That makes sense if OOP is the actual cash I have invested. From a management perspective I am interested in understanding my breakeven point unchanged for reinvested distributions.

I am using OOP Basis Current and OOP Basis Inception. The data range is prior to inception of the position to current day. Current Basis is negligibly above zero, the Basis Inception is negative by thousands and the tax basis (FIFO) is roughly equivalent to the small balance remaining. It appears the OOP Basis Inception is what the Cost - Value graph uses.

So this behavior is expected? I had expected it would flatten to zero instead of going negative once I reached this point. (That, in my mind, would have affected the performance reporting though.)

Is the negative OOP affecting the default reports? (e.g. Investment Performance, Portfolio Performance) I suspect not but want to confirm.

Thanks,

Jason

[Mark]

Hi Jason,

For the OOP Basis Current and Inception fields the starting date range of the report does not matter. For the Current case, it is the OOP basis of the shares owned on the ending report date. It is the amount of money you spent to acquire the still owned shares, minus any money you've received back from these particular shares. If you received back any money from distributions, then that will lower your current OOP basis on these shares. For the Inception case, if you sold for more than you paid, this number can definitely be negative. It is reporting your overall break even point over the life of the investment. For example, if you bought X shares for $1,000, sold X shares for $1,500, and bought Y shares for $100, your historical OOP basis is -$400. You've taken out more than you've put in. A negative number just means you've taken out more money than you've put in. (Your current OOP basis for this same scenario is $100 assuming no distributions).

Your recorded transactions affect the reports, but just because these numbers are small/negative does not indicate there is a problem with your recorded transactions.

[B2B_Investing]

Thanks for the explanation Mark. I just had a different interpretation but, now that I understand it is by design and not transactional error, I like the method and information provided. Thanks again for a great package.

Aloha,

Jason