A mutual fund is a basket of stocks or other financial securities that you can buy shares in. When you sell mutual fund shares, you are required to pay taxes based on the increase in share price from the time you bought the shares to the time you sold them. This can be a bit difficult to figure out if you bought different shares at different times. Fortunately, there are methods that can help you tackle this task.
Your cost basis is the price you initially paid for your mutual fund shares. You will be required to pay taxes on the difference between your cost basis and sales price. If you purchased all of your mutual fund shares at one time, determining your cost basis will be very simple. You need only check your mutual fund statement to find your initial purchase price.
If you bought your shares over a period of time instead of one single purchase, you have a couple of accounting options. If you use a first in, first out method, you make the assumption that the oldest shares are sold first. You can also average the cost of your shares in order to find your cost basis. Each method can be complicated and have different tax consequences, so you may need to check with your accountant in order to find which method is most beneficial for your particular situation.
One thing to consider when choosing an accounting method for determining your mutual fund's cost basis is the fact that once you choose, you are stuck with that method for that particular fund. If you sell all shares of your fund at once, this should not be an issue, but if you only sell some of your shares, you will be required to use the same cost basis method you previously used when you sell your remaining shares.
When you sell shares of stock, you are required to pay capital gains tax on any gains realized since you bought them. Mutual funds buy and sell stock shares throughout the year, which create capital gains even if you do not sell your personal shares. As a result, you are required to pay taxes based on sales inside the fund each year, in addition to gains you realized when you actually sell your own shares.
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