Computing Capital Gains

[twm49]

For years I have been rolling my dividends into buying additional shares of my mutual fund.  Now that I have sold some shares of my fund do I add the the dividends I paid for the purchases into my original purchase to determine the basis for my capital gain?

[robtm]

Yes, when you sell any dividends you reinvested is added to your original cost to get the cost basis of your mutual fund.

[fanfare]

if you started reinvesting after 2012 or thereabouts, the mutual fund company will do all this recording for you.

The 1099-B will indicate Box D, and Box A for any dividends reinvested less than one year before you sold.

@twm49 

[JosephS1 · Accepted solution]

Yes, you add the prior income from dividends claimed on your return to increase the basis of the shares received and sold.  If you sold from the mutual fund broker that is maintaining the fund you should have received a 1099-B for the sales amount and a statement from the broker as to what the basis per share should be.

If you did not receive the statement of basis, you can recreate the basis but, depending on how long you have been reinvesting the dividends the calculation could take some time and not without a fair share of frustration figuring the basis per share.

For the purposes of this example I will make the calculation simple:

Shares Purchased:  100

Price per share:  $10

Total Invested:  $1,000

Dividends claimed on form 1040:  $100 per year for 10 years.

Total income claimed:  $1,000

Original Cost:  $1,000

Total basis when sold:  $2,000 ($1,000 cost plus 10 years of income at $100 per year).

Now the complications come in for the reinvested dividends if additional shares of stock were purchased with the reinvested dividends.  You must year by year calculate and recalculate the basis of each share of stock by the numbers of shares owned and the income which those shares produced.  That is where the frustration may enter the picture.

I strongly suggest you approach whomever the broker for the mutual fund is to see if you can be sent a basis schedule for the shares you own and for the shares you have sold.  In more than a few cases, it turns out that you break even or actually have a small capital loss on the sales of stock for which the dividends were reinvested.

How do I find a Stock's Basis

@twm49 

[fanfare]

As  I said above, the mutual fund is required to do all this for you.

@twm49 

[twm49]

Thank you for your answer.

[fanfare]

"Now the complications come in for the reinvested dividends if additional shares of stock were purchased with the reinvested dividends.  You must year by year calculate and recalculate the basis of each share of stock by the numbers of shares owned and the income which those shares produced.  That is where the frustration may enter the picture."

This is not an issue. if you find this frustrating, you are calculating it wrong.

Of course, as your share count goes up from reinvesting, your dividend goes up.

That's the power of  compounding.

if you're tracking this yourself, See Pub 550 chapter 4 Table 1 for the records you have to keep to know the cost of the shares you sold. Selling shares is First In, First Out.

@JosephS1