How to Calculate Capital Gains on Mutual Fund Shares

Among the benefits of investing in mutual fund shares (as opposed to individual stocks) is the relative ease that taxpayers experience when it comes time to calculate their capital gains. All reputable mutual funds provide their clients with complete records of all transactions, summarized in relatively user-friendly monthly and annual statements that provide all the information needed to calculate capital gains and report them to the IRS.

Things You'll Need

• Schedule D
• Mutual fund statements

Instructions

Calculate Capital Gains on Mutual Fund Shares

1. Maintain a well-organized file of all documents that you receive from your brokerage throughout the year, including monthly statements, quarterly and annual statements and confirmations of each purchase or sale of shares in a mutual fund.

2. Review a sample Schedule D at the beginning of the tax year so that you will know the format and information required for reporting mutual fund capital gains to the IRS.

3. Create a transaction register in spreadsheet or database form on your computer, in a format similar to that found on Schedule D, to record your actual sales of shares in the mutual funds in which you have invested.

4. Enter information for each sale, with its dates, number of shares sold and net price after commissions, alongside information for the corresponding purchase.

5. Conform the amount of shares sold and the amount of shares purchased on each line so that your capital gain reflects profit on a specific number of shares. For example, if you purchased 200 shares of a specific mutual fund March 1 and sold off half of those shares July 15, the applicable line on your spreadsheet should only reflect 100 shares from your March 1 purchase.

6. Calculate your individual capital gains on each sale transaction by subtracting your purchase price from your sale price.

7. Enter the information from your spreadsheet directly into Parts I and II of Schedule D, depending on whether the shares sold were long-term or short-term investments. Long-term investments are defined as assets held for more than 1 year.

Tips & Warnings

• Remember that you do not report or pay taxes on capital gains in your mutual funds until you sell shares in the mutual funds. Among the factors in determining when to sell shares, you may wish to include the presence in a particular tax year of offsetting capital losses or generally lower income.

• Capital gains on mutual funds are normally assessed at your nominal tax rate, up to a limit set by law and subject to change.

• Never rely on online documentation to be there forever. Mutual funds and securities brokerages go through mergers and acquisitions just like all the sectors they cover, and if you tell the IRS that you can no longer find records of your transactions online, the IRS will be as unimpressed as if you had said, "The dog ate my homework." Keep hard copies.