The Best Way to Sell a Mutual Fund

Taking your money out is supposed to be the easy part. But for many mutual fund investors, that's when the headache begins.

Selling mutual fund shares requires a fair amount of organization and planning -- especially if you want to optimize the resulting tax situation. Whenever you sell shares in a mutual fund, you'll generate a capital gain or loss that must be reported to the Internal Revenue Service.

Even if you move money from one fund into another in what seems like a single, seamless transaction, a taxable event still has occurred. You'll owe tax (or can claim a loss) on the sale, and the amount you transfer to another fund will serve as the initial cost basis for that fund.

Determining the cost basis of your shares can be a tricky business, though. But no matter how frustrating the process seems, it's a crucial step.

Defining Cost Basis

The cost basis is the amount of money you've invested in your shares -- any amount above the cost basis is your gain. Basis is essentially the money you plunked down to buy the initial shares, but it also includes sales charges and redemption fees you paid for the share upon purchase or sale. (If you're selling shares and moving the proceeds into a different fund in the same family with a reduced load charge, you must have held the shares for more than 90 days to include the load charges in the basis.)

You should also include in the cost basis any dividends or capital gains distributions that you reinvested to purchase more shares. You'll still owe tax on any capital gains distributions or dividends that you reinvest, but because they'll be counted toward your basis, you won't be taxed again when you sell the shares.

So to calculate the cost basis of the shares you've sold, you'll need to know the dates of each share purchase or sale for the length of time you've been invested in the fund; the number of shares bought or sold each time; the price at which shares were bought or sold; the total dollar amount of each transaction; and any sales charges or redemption fees paid.