| Mutual Funds & Stock Dividend Reinvestment Plans |
The cost basis for mutual funds or
stocks participating in dividend
reinvestment plans presents an
accounting challenge (some would
say nightmare.)
If you have held the mutual fund
or stock for twenty years, you most
likely have at least eighty-one (81)
different tax lots!
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If you kept all your statements, you can easily determine your cost basis by
adding up the original purchase cost and all the dividends that were reinvested.
If some statements are missing, you will need to estimate the missing tax lots based
on the declared dividend amounts per share, the number of shares owned on the
dividend record dates, and the market price per share on the dividend payment
date. Excel worksheets are ideal for this application. The history of declared
dividend amounts can usually be obtained from the mutual fund website or from
customer service.
If the shares were held directly by the mutual fund, they can usually provide missing
statements for a fee. If the shares were held in a brokerage account, the monthly
account statements would show the dividend reinvestment amounts.
If you inherited the mutual fund shares, see the discussion under the "Stocks" menu
for inherited stock which will apply to mutual fund shares, too. Other means of
acquisition discussed under the "Stocks" menu apply in the same way to mutual
funds, too. If you received it as an IRA distribution or as a gift, follow the same
rules as for stocks.
Once you have the detail of all the tax lots that comprise your cost basis, you have
a choice of allocation methods to report cost basis when partial sales occur.
Considerable thought should go in to making this decision, because once you have
started using an allocation method for a particular mutual fund, you cannot change
to another method without requesting permission from the IRS. The four methods
recognized as valid by the Internal Revenue Service are as follows:
1. Average Cost Single Category (available for mutual funds only)
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