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Mutual Fund Cost Basis
Old 01-16-2007, 05:54 PM   #1
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Mutual Fund Cost Basis

I have a taxable account with about 7k in it. Most of the money is invested in mutual funds (PRWCX and VTRIX). Account is at Etrade. Already learned this was not smart should have opened an account at Vanguard or T Rowe Price so I would not pay commisions. My question concerns taxes. Both of these funds had large distributions that were reinvested. However these distributions will be taxed on my 2006 tax return correct? Therefore how do you keep track of your cost basis when you sell shares since some of the money has already been taxed. I thought of making a spreadsheet or keeping statements until I sell shares. Any suggestions? I'm only 20 and don't really have any experience with taxes besides standard W-2 income. Thanks for your help.
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Re: Mutual Fund Cost Basis
Old 01-16-2007, 06:07 PM   #2
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Re: Mutual Fund Cost Basis

I have my dividends and CG in my taxable funds directed to my MMF so that I will not have to deal with this problem.

Vanguard will give you the average cost of the shares that you sold, you can use this number or you can sell specific shares and keep track of it that way.
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Re: Mutual Fund Cost Basis
Old 01-16-2007, 07:58 PM   #3
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Re: Mutual Fund Cost Basis

You could make a spreadsheet, or you could use Quicken or MSMoney. Since computers fail and disks fail, be sure to keep the annual statements forever. Then when you sell, you only have to re-do the calculation from easy-to-read statements.

A few years ago, I sold a fund that I had held since 1983. The annual statements were all together in a loose-leaf notebook. That notebook outlasted 3 computers, a copy of Quicken, a copy of MSMoney, and pre-dated any online recording by the fund company.

Another solution (not recommended) is to sell all the shares periodically to force the issue.
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Re: Mutual Fund Cost Basis
Old 01-16-2007, 08:07 PM   #4
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Re: Mutual Fund Cost Basis

I'll second the use of Money or some other software while keeping annual statements. At age 20, if you begin keeping good records and investing regularly, it will be easier to count your millions.
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Re: Mutual Fund Cost Basis
Old 01-17-2007, 03:41 PM   #5
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Re: Mutual Fund Cost Basis

rjpatt,

The reinvestments from fund distributions are considered purchases and add to your cost basis just like a purchase from your other money. You could just keep track of all your "purchases" including those from reinvested distributions with a simple spreadsheet listing cost, # shares, NAV per share and cumulative shares along with date of purchase and source of funds (e.g. cash, DIV, LTCG, STCG) . If you decide to make a partial sale, you could select e.g. the highest cost basis shares so that your taxable gain would be minimized or in a crash such as in 2000-1, you could perhaps get a tax loss that would lower your taxes.

If you are interested in spending the time to do this (minimal, in my mind), you should probably get hold of the IRS publication about mutual funds (Publication 564) and learn about the specific shares technique. There are certain IRS requirements to show that you used this technique---e.g. gettting a confirming letter from the broker that you did in fact instruct them to sell the specific shares you claim before the sale was made.

You will also have to keep track of the specific shares you sold (e.g. yellow highliter on a paper spreadsheet or the equivalent on Excel). I find that keeping track of the cumulative shares after each transaction (provided you by broker) is useful in case you forget to input a line item. You will be able to figure out where the missing line is because the previous cumulative total and the line item qty do not match the next cum total.

There are also rules about being able or not being able to switch from one method (e.g. average cost basis) to another (e.g. specific shares) that need to be followed.

As others have already mentioned, you should keep the original paperwork for each reinvestment since you will need it as proof of basis when you sell (even if you go the spreadsheet route).
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Re: Mutual Fund Cost Basis
Old 01-18-2007, 02:14 PM   #6
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Re: Mutual Fund Cost Basis

Quote:
Originally Posted by kaneohe
There are certain IRS requirements to show that you used this technique---e.g. gettting a confirming letter from the broker that you did in fact instruct them to sell the specific shares you claim before the sale was made.
Thankfully that's so last millenium.

Fidelity's website now lets you select what shares you want to sell and will calculate the cap gains for you. It's pretty easy to "dial in" a sale tailored to your tax desires.
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