Tax Q&A: Distribution Difficulties

Editor's Note: Tracy Byrnes will be answering questions throughout the tax season to help guide you through your return. Please send her an email to ask a tax-related question. She will pick a few each week to answer for all of our readers.

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I bought shares in a mutual fund several years ago at various prices and have not put money into the fund in the last three years, but I reinvested all my dividend distributions. I know I have paid taxes all along on the distributions, but I sold all my holdings in the fund last year. Do I have to pay more taxes? And if I don't have any of the paperwork, how can I compute the taxes? -- F.L.

Tracy Byrnes: This is a great question. And the simple answer is yes, you have to pay more taxes. But let's walk through the thought process, because it's important to understand.

There are actually two separate transactions here. First, you get the dividend. You owe tax on it. Transaction one is complete.

Now, you decide you want to buy more shares of your fund. Whether you do it with your dividend money or the money you made from a part-time gig as a bartender, it doesn't really matter. It's new money into the fund. Reinvesting those dividends just makes life easier. That's transaction two.

Things get hairy when you try to determine your cost basis, aka purchase price, in the fund -- especially if you don't have any paperwork.

In an ideal world, your mutual fund company has been keeping track of your cost basis.

The good news is that when you sell the shares, you'll get a Form 1099-B reporting just about all the information you need to calculate your taxable gain or loss. So if you sold everything in 2005, you should have received a 1099-B that details the name of the fund, the date of the sale, the amount received on the sale, and the amount you paid for the shares, says Fred Stein, a tax analyst with RIA , a provider of tax information and software to tax professionals. The gain or loss might actually be calculated for you. So just plop those numbers onto your Schedule D -- Capital Gains and Losses and you'll be done.

If you lost your 1099-B, call you fund company and beg for a new copy.

If the 1099-B isn't detailed enough, ask the fund company to send you copies of your purchases over the years. You can crunch the numbers yourself.

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