How to Calculate Non Retirement Mutual Fund Basis

by C. Taylor

The Internal Revenue Service (IRS) requires brokerage companies to report non-retirement mutual fund transactions. Under these regulations, brokerages must also submit the account holder's preferred method for determining cost basis, which is subsequently used when calculating capital gains. Average cost is the most common cost basis method for mutual funds, although you may also elect to track individual shares under the assumption that the first bought shares are also first sold.

Average Cost Method

Look through your investment statements or call your broker to locate the purchase date, number of shares purchased, amount invested and any fees charged for each transaction.

Add all the investment amounts and any fees charged to calculate total investment. As an example, say you invested $3,000 for 100 shares of the non-retirement mutual fund XYZ; six months later you invested $2,000 more for 50 shares. If both transactions charged a $20 fee, add $3,000 plus $2,000 plus $40 to derive the total investment of $5,040.

Total the number of shares purchased. Continuing the example, add 100 plus 50 to calculate 150 shares.

Divide the total investment by the total number of shares. In the example, $5,040 divided by 150 results in an average cost basis of $33.60 per share.

First in, First out

Contact your investment broker or reference your investment statements to find the details of each transaction. You need the same information as described in the Average Cost Method section.

Add any fees charged to the amounts invested for each separate transaction. Continuing the prior example, each investment would total $3,020 and $2,020, respectively.

Divide each investment total by the number of shares purchased during that transaction. In the example, divide $3,020 by 100 to calculate the first transaction's cost basis of $30.20 per share. Likewise, the second transaction's cost basis is $20.20 per share.

Use the first transaction's cost basis when calculating capital gains. When those shares are exhausted, use the second transaction's cost basis, and so on. In the example, if you sold 125 shares, the first 100 shares would use the cost basis of $30.20 per share, but the remaining 25 shares would use the $20.20 cost basis.

Tip

  • Both methods assume the first purchased shares are sold first. This doesn't affect the cost basis for the average cost method, but it does effect the capital gains classification. Shares held longer than one year enjoy lower long-term capital gains tax, but shares held one year or less are taxed as short-term capital gains.

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