The cost basis for mutual funds or stocks participating in dividend reinvestment plans presents an accounting challenge (some would say nightmare.)
If you have held the mutual fund or stock for twenty years, you most likely have at least eighty-one (81) different tax lots!
If you kept all your statements, you can easily determine your cost basis by adding up the original purchase cost and all the dividends that were reinvested.
If some statements are missing, you will need to estimate the missing tax lots based on the declared dividend amounts per share, the number of shares owned on the dividend record dates, and the market price per share on the dividend payment date. Excel worksheets are ideal for this application. The history of declared dividend amounts can usually be obtained from the mutual fund website or from customer service.
If the shares were held directly by the mutual fund, they can usually provide missing statements for a fee. If the shares were held in a brokerage account, the monthly account statements would show the dividend reinvestment amounts.
If you inherited the mutual fund shares, see the discussion under the "Stocks" menu for inherited stock which will apply to mutual fund shares, too. Other means of acquisition discussed under the "Stocks" menu apply in the same way to mutual funds, too. If you received it as anIRA distributionor as a gift, follow the same rules as for stocks.
Once you have the detail of all the tax lots that comprise your cost basis, you have a choice of allocation methods to report cost basis when partial sales occur. Considerable thought should go in to making this decision, because once you have started using an allocation method for a particular mutual fund, you cannot change to another method without requesting permission from the IRS. The four methods recognized as valid by the Internal Revenue Service are as follows:
Just click on the link to be taken to the page that fully describes each method.
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.