Which method of determining the basis of mutual fund shares is incorrect?

The double category method is considered an incorrect method of determining the basis of mutual fund shares because it is not a recognized or established approach within IRS guidelines or standard accounting practices. The basis for mutual fund shares is typically determined using methods that allow an investor to calculate their gains and losses accurately and in accordance with tax laws.

Other recognized methods, such as cost basis, specific share identification, and first-in first-out (FIFO), are valid because they provide clear and accepted ways to track and report the cost associated with mutual fund shares. Cost basis simply refers to the original value of an investment, specific share identification allows an investor to choose which shares to sell based on their acquisition cost, and FIFO assumes that the earliest shares purchased are the first to be sold. Each of these methods is compliant with tax regulations, facilitating accurate reporting during tax season and ensuring proper calculation of capital gains or losses. In contrast, the double category method lacks such validation and practical application in mutual fund share transactions.