Mutual Funds Cost Basis and the 1099-B

Every time a dividend is reinvested in a mutual fund, you’ve just paid more for the investment.  This is because you are income taxed on that dividend income, and you have chosen to buy more of that investment with that income.  We’re talking about mutual funds OUTSIDE of any retirement accounts here.

To determine your cost basis of mutual funds that you sell, you need to add up your original investment (if buying through a brokerage firm, this will be the “BOT” statement) plus all of the dividends reinvested.  For this reason, you need to keep every year end mutual fund statement which details all of the transactions throughout each year, in order to prove your cost basis when you sell. 

Sometimes you may sell only a part of your mutual fund investment.  This is where computer spreadsheets come in handy to keep track of the AVERAGE cost per share which you may use in determining your cost basis.  Or, you can keep track of the specific shares sold, using the cost basis of the first shares purchased as the first shares sold. 

Many mutual fund companies are keeping track of your cost basis information, and these calculations are usually accurate.  I have found inaccuracies, though, which do not include all the fees or commissions paid, as included in the cost basis.  The amounts are usually minor.

When you sell mutual fund shares, you will receive a 1099-B showing the gross proceeds being reported as income to the IRS, and you will need to report your cost basis against that income on the Schedule D of your personal income tax return.

When you “exchange” one mutual fund for another, you are effectively selling shares in one fund, and purchasing them in another.  You will receive a 1099-B showing that sale being reported to the IRS.  This surprises many people because they didn’t realize they were “selling” because the money is still invested.