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Level 3

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

The question pretty much says the whole thing:

 

I sold some mutual fund shares in 2019 that were acquired over many years. I will use the average cost method to calculate the gain to report.

 

Each year, I received monthly distributions to my account, which were automatically reinvested in new shares. Each year, part of the total distributions was ordinary dividends, and part capital gains distributions.

 

  1. Am I correct that those capital gains part of the distributions are "return of capital"?
  2. When calculating the average cost of the shares sold, do I subtract each year's capital gains distribution from that year's cost of new shares (automatically) purchased.

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Expert Alumni

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

Back to your original question: No, you do not "subtract capital gains distributions from the actual cost".  Don't try and make this more complicated than it is.  When your fund distributes dividends and/or capital gains, the share price is adjusted to reflect those distributions (it goes down).  If you reinvest your distributions, those re-investments are purchases of additional shares at that adjusted price.  It's no different that if the fund sent you a check for the dividend or capital gain, and you turned around and bought additional shares.  Your broker dealer or mutual fund should be tracking your average cost for you.  If so, don't adjust it.

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Expert Alumni

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

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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Level 3

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

The "capital gains distributions" I refer to were included on Forms 1099-DIV as such, and not reported on any Form 2493.

 

Does that mean that such capital gains distributions play no role when I compute the "cost" of shares for the average-cost method when I redeem shares?

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Level 3

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

To further clarify, the "capital gains distributions" are part of total distributions over the year all of which are reinvested in additional shares. I pay usual capital gains taxes each year on those amonts.

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Level 3

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

The capital gains distributions were paid to you in cash or additional shares if you reinvest them. They were not added to the basis of the share cost.

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Expert Alumni

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

Back to your original question: No, you do not "subtract capital gains distributions from the actual cost".  Don't try and make this more complicated than it is.  When your fund distributes dividends and/or capital gains, the share price is adjusted to reflect those distributions (it goes down).  If you reinvest your distributions, those re-investments are purchases of additional shares at that adjusted price.  It's no different that if the fund sent you a check for the dividend or capital gain, and you turned around and bought additional shares.  Your broker dealer or mutual fund should be tracking your average cost for you.  If so, don't adjust it.

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Level 3

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

The shares are "not covered", i.e., the fund broker is not required to track basis and report that on 1099-B.

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Expert Alumni

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

That's a shame.  You will have to calculate it yourself.  Just keep it simple:  Get the total dollar amount of all your purchases (including dividend and capital gain re-investments) and divide by your total number of shares.  

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Level 3

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

In 2019 I sold some of the shares in a mutual fund. Since some shares were purchased long ago, the sale was "non-covered", i.e., I have to determine the basis myself. Which means I need to calculate the average share cost, then multiply by the number of shares sold, of course.

 

But...when calculating the average cost, which do I do:

 

  1. total the cost of the shares sold, divide by the number of the shares sold; or instead
  2. total the cost of all the shares I own right now, divide by the number of all shares I own?
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Expert Alumni

For mutual fund shares sale, when calculating average cost, do I subtract capital gains distributions from the actual cost?>

You use the cost of ALL shares owned, before you sold, divided by the total number of all shares, before you sold.

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