You inherit a mutual fund once it is transferred to you after a benefactor dies. The value of the shares on the day they are transferred to you stand as your cost basis. The cost basis is a figure you need for tax purposes to calculate the capital gain or loss, which you report on your tax returns in the year you sell the mutual fund. In effect, when you sell, you subtract the cost basis from the price at which you sell your shares to determine your taxable gain or loss.
How to Calculate Cost Basis for Inherited Mutual Fund
Review your financial statement. When you inherit a mutual fund after someone passes away, your costs basis is the price at which the mutual fund closed on the day that the mutual fund share or shares were transferred to your name. Mutual funds are priced when the stock market closes at 4 p.m. Eastern time. You can review your statement to see what the cost basis is per share, or you can obtain a market price for the mutual fund from the Wall Street Journal online or from any investment company website.
Multiply the price by your number of shares. The trading price for the mutual fund for the day you received the mutual fund is the price per share. Multiply the price by the number of shares of the mutual fund you received. For example, if the trading price per share on XYZ mutual fund is $50 and you received 100 shares, then the total cost basis is $5,000.
Adjusted Cost Basis
Reinvested dividends. Mutual funds typically have an option that allows you to reinvest any dividends that the mutual fund pays back into the fund, which means the dividends purchase new shares of the same mutual fund. If you choose to reinvest your dividends, then over time it may turn the 100 shares of the mutual fund that you originally inherited, for example, into 150 shares.
Calculate your adjusted cost basis. In essence, you used the dividends that were paid to you to buy more shares of the fund To calculate your cost basis for the reinvested funds, use the purchase price on the day you reinvested and multiply this by the number of shares that were purchased from the reinvested funds. This amount can be added to your original cost basis to determine what is referred to as an adjusted cost basis.
For example, if your original cost basis from the inherited mutual funds is $5,000 and the total of the reinvested dividends is $250, then your total cost basis or adjusted cost basis is $5,250.
Kristie Lorette started writing professionally in 1996. She earned her Bachelor of Science degree in marketing and multinational business from Florida State University and a Master of Business Administration from Nova Southeastern University. Her work has appeared online at Bill Savings, Money Smart Life and Mortgage Loan.