You may choose one of these methods to determine the basis of mutual
fund shares:
- Average basis.
The average basis of your mutual fund shares is often calculated and reported
to you by the mutual fund company. If so, this is the easiest way to handle
things on your return. Average basis may be the way to go even if you
have to figure it yourself. To do that, add up your total basis in all
the shares you owned before the sale, and divide by the number of shares.
The result is the per-share basis. You can compute one average basis for
all your shares—those held long-term and short-term—or compute the basis
of shares held long-term and short-term separately. If you use the average
basis method, you must use it for all future sales of shares in that mutual
fund.
- FIFO.
This stands for first in/first out and assumes the shares sold were the
first ones you purchased. You use their cost as your basis. (The IRS assumes
you use this method unless you specifically chose one of the others.)
- Specific share
identification. If you directed the mutual fund to sell specific
shares, you can use the cost of those shares as your basis.
TAX TIP: Don't forget to include these
amounts in your basis; they will reduce your gain or increase your loss:
- Reinvested dividends
- Reinvested capital gain distributions
- 65% of undistributed long-term capital gains
Whenever you reinvest dividends or capital gains distributions, you
buy new shares. So, if you redeem all your shares in the fund, your total
basis includes all those reinvested dividends.
For more information, see IRS Publication 564.