Calculating the Cost Basis of Mutual Funds

Trying to calculate your cost basis mutual funds for tax purposes can be complex, especially if you are not keeping up with it. The cost basis determines how much tax needs to be paid on the investments that were sold. If you are working with a broker, you may receive a copy of the cost basis for your mutual funds. It is best to verify those numbers yourself. Working with mutual funds is a bit more complicated because more shares are sold and reinvested on a regular basis. The correct way to calculate the cost basis starts with gathering your data and choosing your method of calculation.

Gather All Mutual Fund Data

It is much easier to calculate the cost basis of mutual funds as a collective whole. This is how many brokerage firms come up with their numbers. By opening up an excel worksheet you can easily input the name of the investment, the number of shares, their purchase price, as well as how much they were sold for and on what date. For record keeping sake, it is best to write down details regarding each investment as you go along.

Picking A Method

There are a few methods of calculations that you can can use. For example, you can use the First in/First out method by selling the shares that were purchased, first. This method is much easier to use, but also has more tax consequences as a result. Capital gains are larger, the longer you have a share. FIFO is also calculated individually leaving them with their own cost basis.

Mutual fund shares can also use an average cost option. This method allows investors to divide the total number of shares they have by the gains made, and the reinvested dividends. Splitting up the method into a single, or a double category also works. Splitting investments into a short term and long term category will make things much easier to calculate.

Calculating Cost Basis

To calculate both the single, or double category, start by calculating the average cost in both the long and short term groups. Divide the amount of shares in each group by the amount invested. For example, if let's assume you are the owner of 50 units of a particular fund and you originally paid $10 a share, with a total price of $500. You receive a dividend of $0.90 a share and you stand to receive $45. You then reinvest your dividend in the same fund at a current price of $15, which means you have bought 3 more shares. In this scenario, your cost basis is $10.283, which is $545/53.

Your scenario may be more or less difficult, depending on the amount of investments you have. Keep accurate records of your investments to help you stay on track and eliminate the need to do research later. Documenting your investments as you go is the best way to avoid confusion later.