When you purchase shares using reinvested dividends, it's as if the dividends were paid to you in cash, and then you immediately used that cash to purchase new shares.
The amount of the distribution that you use to purchase each share is the original cost basis for that share.
Adjusted basis - You may need to adjust the basis of your mutual fund shares in certain circumstances:
- Undistributed capital gains. If your mutual fund sends you a Form 2439: Notice to Shareholder of Undistributed Long-Term Capital Gains increase your basis by the amount of undistributed capital gain that you include in income and reduce your basis by the amount of tax paid by the fund on the undistributed gain (both amounts are reported to you on Form 2439). Finally, don’t forget to claim a tax credit on Line 73 of your 2019 Form 1040 for the amount of tax paid by the fund in 2019.
- Return of capital (nontaxable) distributions. Reduce your basis (but not below zero) by the amount of any "return of capital" (nontaxable) distributions that you receive from the mutual fund. These kinds of distributions are shown in Box 3 of Form 1099-DIV. They are not the same as capital gain distributions or exempt-interest dividends.
For more details, see Mutual Fund basis in Cost Basis: Tracking Your Tax Basis
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