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.
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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.
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:
For more details, see Mutual Fund basis in Cost Basis: Tracking Your Tax Basis
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?
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.
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.
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.
The shares are "not covered", i.e., the fund broker is not required to track basis and report that on 1099-B.
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.
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:
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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