How to Compute the Cost Basis Average for Funds
If you sell shares of a mutual fund, you are required to declare the gain or loss on your income tax return. First, you must know your basis, or cost, of the mutual fund shares that have been sold. For tax declaration purposes, there are several ways to calculate the cost basis. The average cost basis method is described here.
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Things You'll Need
- Year-end mutual fund statements for all of the years you have owned the fund.
Instructions
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1
Add all of the dollar amounts you have invested in the mutual fund, including the initial deposit and any subsequent additional investments. This total is the amount you have invested in the fund.
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2
Add the total dollar amounts of any reinvested dividends or capital gains. Mutual fund distributions are taxed separately. If they are reinvested into more fund shares, they increase the cost basis of the account.
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3
Add the total amounts of the invested dollars and reinvested distributions. The result is the total cost basis of your mutual fund account.
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4
Divide the total cost basis amount by the total number of shares in the account. The resulting number will be the average cost per share basis.
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1
Tips & Warnings
If some of the shares in the account have been owned for less than one year, separate calculations should be done for shares held greater than a year and shares held for less than a year. Short-term gains and losses for securities held less than one year are treated differently for tax purposes.
If you do a lot of sales or redemptions of mutual funds shares, calculating the average cost basis can be complicated. Use another method such as first-in-first-out, or specific share designation to determine the cost basis for tax purposes.
The end-of-year mutual fund statement will list all of your fund transactions for the year. Keep these statements as a permanent record of your transactions.
Keep a record of your average cost basis calculation. If you make a partial sale then buy new shares, this information will be required to calculate a new average cost basis.
