When you sell shares of a mutual fund, you owe taxes to the Internal Revenue Service (IRS) based on the difference between the sale price and your cost basis, or purchase price. If you reinvest the dividends you receive from a mutual fund by buying more shares, you typically pay a different price per share than in your original purchase. You must factor the reinvested dividends into your cost basis. Using the average cost method, you can determine the total cost basis and cost basis per share based on your original purchase and reinvested dividends.

1. Determine from your mutual fund statements the number of shares you originally purchased and the price you paid per share. Multiply the number of shares by the price per share to determine the initial investment. For example, assume you bought 100 shares for $10 per share. Multiply 100 by $10 to get a $1,000 initial investment.

2. Determine the amount of dividends you reinvested in the mutual fund and the price you paid per share each time you reinvested dividends. Divide the amount of each reinvestment by the price per share to calculate the number of shares you bought with each reinvestment. Continuing the example, assume you reinvested dividends of $150 at $15 per share. Divide $150 by $15 to determine that you bought 10 additional shares.

3. Add together the original investment amount and the amounts from each additional investment to determine the total cost basis of your shares. In this example, add together $1,000 and $150 to get a total cost basis of $1,150.

4. Add together the number of shares you originally purchased and the number of shares you bought with each additional investment to determine your total number of shares. In this example, add 100 to 10 to get 110 total shares.

5. Divide the total cost basis by the total number of shares to calculate your cost basis per share. In this example, divide $1,150 by 110 to get a cost basis per share of $10.45. This means that if you sell your shares of the mutual fund for more than $10.45 per share, you would owe taxes on the sale.

#### Tip

- Consult an accountant to determine the taxes you owe based on your specific situation when you sell shares of a mutual fund.

### Items you will need

- Mutual fund statements

#### References

- The Intelligent Portfolio: Practical Wisdom on Personal Investing from Financial Engines; Christopher L. Jones
- Mutual Funds For Dummies, Sixth Edition; Eric Tyson
- The McGraw-Hill Investor's Desk Reference; Ellie Williams

#### Photo Credits

- Comstock Images/Comstock/Getty Images