Calculating a cost basis...

snipped-for-privacy@gmail.com (chrisexv6) posted:

Actually, the equation might better read: Proceeds - Cost basis = net taxable gain. (The "cost basis" computation is what you're concerned about -- and it should properly include _all_ reinvested funds.)

In general, your logic is correct; however, you should carefully check statements for previous years (undoubtedly available from the mutual funds involved), or simply phone the customer service number to determine whether CGD (Capital Gains Distributions) were _reinvested_ for your wife's holdings. The most common practice [for mutual funds where reinvestment is requested] is that the mutual fund will reinvest _all_ dividends and distributions. So, if you don't verify this, you might be _understating_ your wife's cost basis ... which would cause her/you [if MFJ] to pay unnecessary extra taxes. Bill

snip

See change in your equation. For your situation, the reinvested Cap Gains and Reinvested Dividends are no different, and also no different than if you added small sums to the funds, quarterly, or annually. When distributed, you got cash, paid tax, whether cap gain or dividend, and in your case you used the money to buy more shares. So long as you tracked those new purchases, you have all you need to calculate your basis. Joe JoeTaxpayer.com

Reinvested capital gains distributions also are included in your basis calculation. So the correct formula is

taxable amount from sale = sale price - (original investment

• reinvested dividends + reinvested capital gains distributions)

If anything was not reinvested, it is not included in the above calculation.

Cap gain distributions only get get subtracted (in your equation above) if they are reinvested. The whole total basis thing is actually very simple: (1) *All* purchases increase basis by the amount of the purchase. (2) *All* reinvestments increase basis by the amount of the distribution, regardless of what type of distribution (dividend, capital gain, return of capital, whatever). (3) Return of capital distributions *reduce* basis by the amount of the distribution, whether or not they are reinvested (of course, if they are reinvested, that reinvestment increases basis back -- see (2) above).

And (1) and (2) really could be collapsed together into (1), since all a reinvestment is, is a shortcut to save the fund mailing you a check and you signing the check over to them and mailing it right back to buy more shares.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

If the capital gains were paid to you in cash, they don't affect the basis at all. If they were reinvested into the funds, the amount reinvested is part of the basis. That is, they're treated exactly like dividends for this purpose (the only difference being the tax rate). Seth

all reinvested dividends (including capital gain divs) are added to cost basis ___________________________________

-----> real address on hobokeni or hobokenx

• reinvested capital gains

The fund reduced the NAV at the time they made the distributions, so the capital gain at sale time has already been reduced, and that avoids the double taxation.

Correct.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA

Barry - dumb question I've wondered about for a while. If the NAV is reduced by the amount of the capital gain (which is true), so what's the big deal about receiving them if the value of what you own after the distribution is the same? Or is that true? Regards

Andrew

The big deal is that you get taxable income but no economic gain.

Assume you buy 1,000sh of a fund at $20/sh. Total value is $20,000. The very next day the fund declares a $2/sh distribution and the NAV drops to $18/sh because of it.

If you don't reinvest distributions, you have $18,000 ($18 x 1000sh) of fund + $2,000 cash = $20,000

If you do reinvest distributions, you have $20,000 ($18 x 1111.111sh) of fund/

Either way you have $2,000 ($2 x 1000sh) of taxable income (and a $2,000 unrealized capital loss).

If you had waited one more day to buy the fund, you'd be in the same economic position but would have escaped $2,000 of taxable income.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Suppose you buy the mutual fund the day before it declares the gain. The next day it declares the gain. The value of what you own is the same, but suddenly you owe taxes on it. You're paying income or capital gains taxes even though you did not receive any income or increase in value. The term for buying a fund right before it makes a distribution is "buying a dividend". Compare that with owning a fund for the whole year before it makes the distribution. In this case, if its holdings increased in value during the year, so did the NAV. When it distributes the gain, much of this is gain that you actually saw in your holding. So you end up paying taxes on something you actually received. It's still somewhat of a big deal, but not as bad as buying a distribution. Your paper gains are turned into income or realized gains when the fund distributes them, so you can't put off paying taxes. And in the case of capital gain distributions, they may include gains that had been accumulating in the fund for years before you purchased the shares.

-- Barry Margolin, snipped-for-privacy@alum.mit.edu Arlington, MA