The best part of investing in a mutual fund is making a profit. If a fund announces a capital gain distribution, congratulations! You've selected a fund that has made some successful investments. Unfortunately, as a shareholder, you have to pay tax on that gain. The good news is that if you reinvest the gain, you can adjust the cost of your fund upward, avoiding double taxation if you sell the fund down the road.
Reinvest the distribution. Most mutual fund companies allow you to automatically reinvest your distributions, including capital gains payouts. If you don't reinvest your distribution, the basis of your mutual fund remains the same.
Locate the original price you paid for the fund. This includes any commissions or fees you had to pay to buy the fund. If you don't have a copy of this cost in your records, the broker or financial institution you bought it from usually will.
Record the amount of the reinvested capital gain distribution. Your mutual fund company is required by law to send out a Form 1099 at the end of the year showing how much you received in distributions for the prior tax year. Your capital gains distributions, if any, will appear on this form. If you haven't yet adjusted your mutual fund cost basis and have received more than one year of capital gains distributions, you must collect your 1099s from each tax year since you originally bought the fund.
Add the amount of your capital gains to your cost basis. If you've been adjusting your mutual fund cost basis every year for distributions, you have to add only the most recent capital gains distribution to your adjusted basis. If you're totaling the amount for the first time, add all of the capital gains you've ever received from the fund to your original cost basis.
Calculate the per-share cost basis. Divide your total adjusted costs basis by the number of mutual fund shares you own. The result is your average adjusted cost per share.
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