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IRS.gov Website

Frequently Asked Tax Questions

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

  1. How does the return of principal payments affect my cost basis when I sell mutual funds?
  2. How do I calculate the average basis for the sale of mutual fund shares?
  3. 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?
  4. How do I calculate the average cost method of a mutual fund if the fund price splits?
  5. 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?

Rev. date: 08/04/2012

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

Unlike a dividend or a capital gain distribution, a return of capital:
NOTE:  A return of capital or principal is more commonly referred to as a Nondividend Distribution.

Rev. date: 08/04/2012

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

In order to figure your gain or loss using an average basis:
There are two methods for calculating average basis:
Single-category method:
Double-category method:
Beginning on April 1, 2011, the double-category method will no longer be available for calculating average basis with respect to shares in a mutual fund after that date.  You must use the single-category method for such shares if you choose to use average basis.

Rev. date: 08/04/2012

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?

No, you may use a different method for shares in a different mutual fund.

Rev. date: 08/04/2012

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

If your mutual fund splits, or adjusts its price:

Rev. date: 08/04/2012

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?

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.