-
Step 1
Figure out how many shares of the mutual fund you sold. This is the number of shares you will factor into your average single category cost basis.
-
Step 2
Check your records to see what you paid for the shares you sold. It is common for these shares to have been purchased on several different occasions at different prices.
-
Step 3
Factor in reinvested dividends and reinvested capital gains. They count as money you invested in the mutual fund.
-
Step 4
Add together what you paid for the shares then divide by the number of shares you sold. This is your average single category cost basis.
-
Step 5
Understand the tax ramifications of average single category cost basis. It assumes that the first shares you purchased are also the first shares sold. This benefits you. Shares held more than one year are taxed at a lower rate than those held for less than one year. Your older shares are more likely to incur fewer taxes.
-
Step 6
Realize that you might be able to save more in taxes if you use specific share identification instead of average single category cost basis. To use specific share identification, you must have records of all share purchases and sales complete with dates, prices and number of shares transacted. The specific capital gains need to be calculated which involves much more paperwork than average single category cost basis. However, it can result in a lower tax bill.
