In order to figure your gain or loss using an average basis, you must have acquired the shares at various times and prices and have left them on deposit in an account handled by a custodian or agent who maintains an account for the acquisition or redemption of these shares.

There are two average basis methods:

• Single-category method, and
• Double-category method.

Single-category method. First, add up the cost of all the shares you own in the mutual fund. Divide that result by the total number of shares you own. This gives you your average per share. Multiply that number by the number of shares sold.

Double-category method. First, divide your shares into two categories, long-term and short-term. Shares held for 1 year or less are short-term. Shares held for more than 1 year are long-term. Then use the steps above to get an average basis for each category. The average basis for that category is then the basis of each share in the sale from that category.

Once you elect to use an average basis method, you must continue to use it for all accounts in the same fund. You must clearly identify on your tax return the average basis method that you have elected to use. You do this identification by including "AVGB" in column (a) of Form 1040, Schedule D (PDF), Capital Gains and Losses.

Refer to Publication 564, Mutual Fund Distributions.

No, you may use a different method, for shares in a different mutual fund. However, once you have elected to use an average basis method to compute the gain or loss on shares in a mutual fund, you must use that same method for the sale of shares from any account in that same fund.

References:

• Publication 564, Mutual Fund Distributions

If your mutual fund splits, or adjusts its price, it is treated like a stock split. Your total basis doesn't change after the split, but since you now own more shares without paying any more money, your per-share basis will decrease. To calculate your per-share basis, divide the total cost that you have invested in the fund (minus any shares previously sold) by the current number of shares that you hold.

References:

• Publication 550, Investment Income and Expenses