Question:   How do I calculate the average basis for the sale of mutual fund shares?

Answer:   In order to figure your gain or loss using an average basis:

• You must have acquired the shares at various times and prices.
• 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.
• 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 described under the single-category method to get an average basis for each category.
• The average basis for that category is then the basis of each share sold 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 indicate the identification by including "AVGB" in column (a) of Form 1040, Schedule D (PDF), Capital Gains and Losses.