How do I calculate the unit-cost basis of my mutual-fund shares?
QUESTION: I have two funds which have had the dividends automatically reinvested. How do I calculate the unit-cost basis? I do know the original purchase date, original number of shares purchased and cost for these. But I have no idea how to determine the cost for the additional ones gained through reinvestment.
ANSWER: It shouldn't be too hard to calculate the cost basis of the shares purchased through dividend reinvesting. For a down-and-dirty average, all you need is your filed tax returns, says Ed Slott, a Rockville Centre, N.Y.-based certified public accountant. (Remember, dividends are taxed on an annual basis, provided your fund is held in a taxable account, so your 1099-DIVs should be a good record of the amount you reinvested.) Add together the amount you invested originally (including any commissions or load charges paid to your broker) with your total dividend amount, and then divide by the number of shares you now own for your average cost basis.
If, however, you're looking for your cost basis either because you want to figure out your personal rate of return or for tax-planning purposes (should you be planning to sell shares) then you should be more specific. Fortunately, this is still pretty simple, and you probably won't need to do any calculations at all. All you need to do is gather together your year-end statements and look for the net asset value, or NAV, of the shares at the time of reinvestment. The NAV is the price that you paid for those shares, and that's your cost basis. Now, if you don't have the NAV, you can divide the dividend by the number of shares you purchased. If, say, a $100 dividend purchased five shares, the cost basis for those shares would be $20. Now repeat this exercise for each date of reinvestment, since the specific cost basis is tied to the changing value of the portfolio, meaning it will be lower when shares are cheap and higher when they're pricey.
Why should you care about the cost basis? As we mentioned above, fastidious shareholders need this information to calculate a personal rate of return. (You would, of course, have to factor in expenses.) As you might imagine, figuring this out on your own is quite complicated, so if that's why you're asking this question, your best bet is to plug your data into the portfolio tool on the Morningstar Web site (it's free, but you must register).
The other reason you might care about the cost basis of each share is if you're redeeming shares for the first time (and not liquidating the entire account). That's because there are four different methods for calculating your cost basis. And if you've already sold fund shares without identifying which shares to sell, you no longer have that option. Being strategic as to which shares you sell (based on the price or the time at which you bought them) could have significant tax implications. "The buying and selling information has to be very specific," warns Michelle Smith, managing director of the Mutual Fund Education Alliance, the trade association of the no-load mutual-fund industry.