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How To Determine Capital Gains and Losses for Mutual Funds
If you redeemed or exchanged mutual fund shares during the year, you may have incurred capital gains and/or losses. In that case, you will need to determine your net gain or loss for income tax purposes. This is done by comparing your cost basis in the shares sold to the selling price. More information can be found in IRS Publication 564, titled "Mutual Fund Distributions."
You have three choices for determining your cost basis:
Average Cost Basis
First In, First Out (FIFO)
Specific Identification
Average Cost Basis
Using your dollar cost average is one of the simplest ways to calculate your capital gain or loss. With this approach, the cost of the fund shares sold is derived at the time of a redemption by dividing the amount you paid for the shares (the total cost of the shares) by the number of shares in your account. This reveals the average price you paid per share, without specifying any particular share. In many cases, you are provided with the average cost basis of shares sold on Form 1099-DIV.
First In, First Out
If you purchased your shares at different times and at different prices, you can use the first in, first out method of computing your capital gains. Using this method, the shares you acquired first are used as the basis for the shares sold. For instance, you would start with your oldest shares first and move toward the newest shares. To make this easier, be sure to keep good records of the dates and prices at which you bought and sold your shares.
Specific Identification
This approach gives you the most control by enabling you to specify exactly which shares you are selling at the time of the sale. It also requires that you keep exacting records of all your mutual fund transactions.
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