How to Figure Out the Mutual Funds Average Cost Basis

If you sell shares of a mutual fund, you are required to pay income taxes on any profit, or you can take a tax deduction if you sold at a loss. Your gain or loss can be calculated by subtracting the cost basis of shares sold from the proceeds of your sale. Calculating the correct cost basis is important to completing your tax return accurately.

Difficulty: Challenging

Instructions

Things You'll Need:

• Mutual fund annual statements

1. Add the total amount you have invested in the mutual fund--including the initial purchase and all subsequent purchases.

2. Total all dividends and capital-gain distributions that have been reinvested into your fund.

3. Add together the totals from Steps 1 and 2 to determine the total cost basis of your mutual fund shares.

4. Divide the total cost basis by the total number of shares you own. The result is the average you paid per share, or the average cost basis.

Tips & Warnings

• The IRS allows several ways to calculate cost basis on mutual-fund shares that you own. First-in, first-out--or specific share declaration--may result in a lower income-tax bill. Profits on shares held for longer than a year are subject to long-term capital-gains tax rates when sold. Calculating the average cost basis on long-term and short-term shares separately may result in a lower income-tax bill.
• You must keep accurate records of your mutual-fund purchases and sales. Numerous purchases, sales and reinvested distributions can make cost-basis calculations complicated. If you do not add the distributions you have received into the cost basis, you could pay income tax twice on the same earnings.

References

• Mutual Fund Education Alliance FAQs