What Is a Mutual Fund Cost Basis Statement?
When you sell mutual fund shares, the cost basis is used to calculate the amount of your capital gain or loss. The ability to reinvest mutual fund distributions makes calculating the cost basis a little trickier. Many mutual fund companies provide cost basis statements to investors, and starting in 2012, fund companies reported cost basis from some mutual fund sales on the IRS Form 1099-B sent to you and the IRS.
Mutual Fund Cost Basis
For most types of investments, the cost basis is how much you paid to make the investment. A mutual fund with reinvested distributions works a little differently. Each distribution you earn is taxed in the year it was earned and if reinvested, that money is viewed as an additional investment in the fund and increases the cost basis. As a result of the reinvestment, you end up with numerous share purchases in a mutual fund account, and those purchases must be accounted for in the cost basis when shares are sold and reported for taxes.
Cost Basis Methods
The tax rules allow several different options for reporting the cost basis of sold mutual fund shares. You can choose from using an average cost of shares, use a first-in-first-out method or designate which shares were sold. Average cost basis is the most widely used because the calculation is fairly straightforward and the option does not require an investor to go through a stack of mutual fund statements and count which shares are to be used with the other reporting choices. If the fund company calculates and reports the cost basis for you, you could easily use one of the other reporting options.
Cost Basis Reports
Most mutual fund companies provide cost basis statements to investors. The details and type of cost basis used vary from fund company to fund company. Some companies just provide an average cost basis calculation. Others allow you to choose the type of cost basis and then provides reports based on your selection. Although cost basis information on its own is nice to know, its real value comes when it is time to report fund sales on your taxes. You may want to check with the fund company concerning the type of reports the company can provide.
2012 Form 1099 Requirements
For mutual fund shares which were purchased after January 1, 2012, the mutual fund companies are required to include cost basis information on the IRS form 1099-B when those shares are sold. The default method for calculating cost basis is average cost, but you can tell your mutual fund company that you would like them to report cost basis using an alternative method. With the 1099-B reporting, the cost basis you use on your tax return must match the cost basis reported to the IRS on the 1099-B.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.