The Average Cost Single Category method is one of the most commonly used ones for mutual fund holdings with many tax lots. It is the one that most mutual fund companies use as the default method because it is easy to display a single number on your account statement.
It cannot be used if you have any shares in physical certificate form.
You have to inform the IRS about your election the first time you use this method, or they will assume you are using FIFO (First In First Out). Once you have selected this method, you cannot change to another method without IRS approval.
You can only use this method for mutual funds, not for stocks or bonds.
Under this method, the holding period is always long-term, which simplifies the accounting a lot.
To apply this method, every time you have a dividend reinvestment, you just add the dividend dollar amount to your cumulative cost total and add the number of shares reinvested to your cumulative total shares. Divide the cumulative cost by the cumulative shares for your new average cost per share.
If you sell any shares, subtract the number of shares sold from your cumulative share total and subtract the product of the average cost times the number of shares sold from the cumulative cost total. To check the accuracy of your math, the remaining cumulative cost divided by the remaining cumulative shares should equal the same average cost per share as it was before the sale.
Here is an Excel worksheet that you can download and use to compute your mutual fund cost basis under the average cost single category method.
If you do not have access to an Excel spreadsheet program, you can copy the column headings below to a sheet of vertically-lined accounting paper and make the calculations manually.
