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First-in First-out (FIFO) Method
Correctly determining the cost basis of your shares is essential for properly calculating your capital gain or loss on Schedule D of your federal income tax return.

To calculate your cost basis, you will need Form 1099-B and your year-end Investor Statements.

When using the FIFO method, the first shares purchased are considered the first shares redeemed. The oldest shares still available are considered the first ones sold. If you do not specify a method, the IRS will assume you used the FIFO method.

Let's use the following chart for the example below.

History of Sample Account - State Farm Equity Fund (Class A shares)
    Principal Price Shares Cumulative Shares
7/12/02 Purchase $1,000 $50.00 20.000 20.000
8/9/02 Purchase $1,000 $53.00 18.868 38.868
5/2/03 Purchase $5,000 $51.00 98.039 136.907
12/29/03 Reinvested Dividend $45 $52.00 .865 137.772
Totals   $7,045     137.772
           
    Proceeds Price Shares  
12/30/03 Partial Redemption $500 $55.00 9.091  
           
Prices and dates indicated are hypothetical.

Example
We will use our Equity Fund example to determine the cost basis when using the FIFO method. We will sell the first shares owned which are the shares purchased on July 12, 2002.

(1)Our cost basis will be $454.55 (number of shares redeemed multiplied by purchase price on July 12, 2002: 9.091 shares X $50.00). Note: 10.909 shares remain in the account at a purchase price of $50.00.

(2)This will create a capital gain of $45.45 (proceeds from the redemption less the cost basis: $500 - $454.55). This is a long-term capital gain since the shares were held for longer than one year.

(1) 9.091 number of shares redeemed
  X $50.00 price on July 12, 2002
  $454.55 cost basis
(2) $500.00 proceeds
  - 454.55 cost basis
  $45.45. long-term capital gain

It is important to know the advantages and disadvantages of using each method for calculating cost basis because once you begin using a method for a particular fund, you cannot change methods without prior approval from the IRS. However, you may use different methods for different funds. You must state on your income tax return which method you have chosen, or the IRS will assume you are using the FIFO method.

An important point to keep in mind as you are calculating your cost basis is that reinvested dividends and capital gains should be included in your cost basis. Any increase in cost basis will decrease your taxable capital gains, or increase your capital losses.

Capital losses may be beneficial to you as they generally may be used to fully offset other taxable capital gains. If capital losses remain after offsetting capital gains, they may be able to be used to offset up to $3,000 of ordinary income for the current year.

For more information on the calculation of cost basis, see IRS Publication 564 – Mutual Fund Distributions.

This information is intended to serve as a reference tool to assist you with filing your federal and state tax returns, but it is not intended to serve as legal or tax advice. For any specific tax questions, you should contact the IRS at 1-800-829-1040, visit their website at www.irs.gov or consult your professional tax advisor.

State Farm VP Management Corp. Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook.

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