How to Calculate Cost Basis of Mutual Funds

If  you sold mutual fund shares, you need to calculate cost basis of the shares sold in order to figure gain or loss of the sale.

For mutual fund shares purchased after 2011, It is required that the cost basis of shares sold must be reported in Box 3 of Form 1099-B, which should be sent to you by your brokerage firm.

For mutual fund shares that you purchased before 2012, Your brokerage firm may  or may not provide the cost basis to you. If the cost basis of mutual fund shares is not provided, you will have to figure out the cost basis by yourself.

3 methods to calculate cost basis of mutual funds

When you sell mutual fund shares, you need to identify which shares you want to sell and then determine cost basis of the shares sold. There are 3 methods that you can use to identify and calculate cost basis of mutual funds.

1. Average basis method.

Average basis is the total cost of identical shares you own just before the sale divided by total number of shares. You must make the election to use this method for mutual funds you purchased after 2011. You can make the election online with your broker or send the election form (provided by your broker) to them. For purpose of determining long-term or short-term gain or loss, you consider shares sold in order of purchase date, starting from the oldest shares.

2. Specific share identification method.

You identify specific shares you want to sell and have your broker or agent sell these shares for you.

3. First-in, first-out (FIFO) method.

You use the basis of shares in order of your purchase date, starting from oldest shares.

Cost basis of mutual funds

The basic formula to calculate cost basis of mutual funds is shown on the table below. 

1. Purchase price of shares - this is the amount you paid to purchase mutual fund shares. You can find it from the purchase confirmation statement or your account statement from your brokerage firm.

2. Dividend and capital gain reinvested - This is dividend and capital gain distributed to you that you reinvested to purchase more shares. You can find it from your account statement from your brokerage firm.

3. commissions paid - if you paid commissions to purchase mutual fund shares, you can increase the basis by the commissions you paid.

4. load charges - if you paid load charges to purchase mutual fund shares, you can increase the basis by the load charges you paid.

5. Undistributed capital gain - This is your share of capital gain that is not distributed to you. If you have undistributed capital gain from a mutual fund, you should receive Form 2439. You can find the capital gain amount in Box 1 of Form 2439 and tax paid on capital gain in Box 2.

6. Return of capital distribution - This distribution is a return of your investment from mutual fund and is not taxable. If you get return of capital distribution, you should find it in Box 3 of Form 1099-DIV.

The example below shows how cost basis and gain or loss are calculated under each method.

For more information, please see IRS Publication 550, Investment Income and Expenses and Publication 551, Basis of Assets.

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