Capital Gains, Losses/Sale of Home > Mutual Funds (Costs, Distributions, etc.)

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Frequently Asked Tax Questions

Capital Gains, Losses/Sale of Home - Mutual Funds (Costs, Distributions, etc.)

Rev. date: 1/2009

I have both purchased and sold shares in a money-market mutual fund. The fund is managed so the share price is constant. All gain is reported as dividends. Do I have to report the sale of these shares?

Capital Gains and Losses
Dividend
Gain
Mutual Fund
Mutual Fund Distributions
Mutual fund shares.
Stock Sale

Generally, whenever you sell, exchange, or otherwise dispose of a capital asset, you report it on Schedule D.

If the share price were constant, you would have neither a gain nor a loss when you sell shares because you are selling the shares for the same price you purchased them.
If you owned shares that were later sold, the fund or the broker should have issued a Form 1099-B. That form is issued without regard to whether there is a gain or loss on the sale. It reports a sale or exchange of an investment asset and sales proceeds.

Rev. date: 1/2009

How do return of principal payments affect my cost basis when I sell mutual funds?

Basis
Cost Basis
Mutual Fund
Mutual Fund Distributions

Unlike a dividend or a capital gain distribution, a return of capital:

Reduces your basis in your mutual fund shares.
A return of capital is a return of part of your investment (cost).
Distribution cannot reduce your basis below zero.
Once your basis reaches zero, any return of principal is capital gain and must be reported on Form 1040 Schedule D (PDF), Capital Gains and Losses.

Rev. date: 1/2009

How do I calculate the average basis for the sale of mutual fund shares?

Average Basis
Average Costs
Basis
Mutual Fund
Mutual Fund Distributions
Mutual fund shares.

In order to figure your gain or loss using an average basis:

You must have acquired the shares at various times and prices.
Have left them on deposit in an account handled by a custodian or agent who maintains an account for the acquisition or redemption of these shares.

There are two average basis methods:

Single-category method.
Double-category method.

Single-category method:

First, add up the cost of all the shares you own in the mutual fund.
Divide that result by the total number of shares you own.
This gives you your average per share. Multiply that number by the number of shares sold.

Double-category method:

First, divide your shares into two categories, long-term and short-term.
Shares held for 1 year or less are short-term.
Shares held for more than 1 year are long-term.
Then use the steps described under the single-category method to get an average basis for each category.
The average basis for that category is then the basis of each share sold from that category.

Once you elect to use an average basis method:

You must continue to use it for all accounts in the same fund.
You must clearly identify on your tax return the average basis method that you have elected to use.
You indicate the identification by including "AVGB" in column (a) of Form 1040, Schedule D (PDF), Capital Gains and Losses.

Rev. date: 1/2009

How do I calculate the average cost method of a mutual fund if the fund price splits?

Average Costs
Cost Method
Mutual Fund
Mutual Fund Distributions
Stock Split

If your mutual fund splits, or adjusts its price:

It is treated like a stock split.
Your total basis doesn't change after the split.
Your per-share basis will decrease since you now own more shares without paying any more money.
To calculate your per-share basis, divide the total amount you invested in the fund (minus an amount equal to the basis of any shares previously sold) by the current number of shares that you hold.

Rev. date: 1/2009

I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares?

Capital Gain Distributions
Capital Gains and Losses
Information Returns
Mutual Fund
Mutual Fund Distributions
Undistributed capital gains of mutual funds and REITs

A mutual fund is a regulated investment company that pools funds of investors allowing them to take advantage of a diversity of investments and professional asset management.

You own shares in the fund, but the fund owns assets such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for you is to sell these assets at a gain. If the asset was held by the mutual fund for more than one year, the nature of the income is capital gain, which gets passed on to you. These are called capital gain distributions, which are distinguished on Form 1099-DIV (PDF) from other types of income such as ordinary dividends.

Capital gains distribution are taxed as long term capital gains regardless of how long you have owned the shares in the mutual fund. If your capital gains distribution is automatically reinvested, the reinvested amount is the basis of the additional shares purchased.

Rev. date: 1/2009

If I used an average basis method for shares of one mutual fund I sold, do I have to use it for all mutual funds I sell?

Average Basis
Average Costs
Mutual Fund
Mutual Fund Distributions
Mutual fund shares.

No, you may use a different method for shares in a different mutual fund. However, once you have elected to use an average basis method to compute the gain or loss on shares in a specific mutual fund, you must use that same method for the sale of shares from any account in that same mutual fund.


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