Mutual Fund: average cost basis -single category method

[The Sad Man]

I want to make sure I'm not getting double taxed on a sale of a mutual fund resulting in a long term gain. I had all my dividends and capital gain distributions automatically reinvested - a dumb move that I just changed now. The cost basis used on my 1099-DIV is "Average Cost Basis, Single Category Method." From what I can tell, this is just a weighted average of all shares purchased, so that it correctly accounts for the dividends and capital gains that were automatically reinvested. Is this correct? Any reason I shouldn't be using this cost basis?

[Gandalf]

Unless the amounts are large, go for it: it's simplest, and you aren't double taxed.

In principle, if you kept great records, and at some point cashed in part but not all of your fund, you could elect to be selling the shares with the highest cost *, thereby minimizing your capital gain. The flip side to that is that when you later sold the rest of it, you would have a higher gain then. If you use the average method, the fund will keep track of it, and tell you the cost of what you sold.

* (I think you could elect to sell the highest cost. Or maybe you would have to sell them FIFO, or LIFO, or some other prescribed basis. Anyway, the impact would be that you would have a higher gain on some sales, and a lower gain on others, with the same cumulative total gain when all has been sold. Or smaller/larger losses, if the fund hasn't done well.)

Unless you redeemed some of the fund this year, you don't have to commit yet. The first year that you redeem some, you have to choose. If you aren't going to use the average cost basis, you need to start keeping careful records of every time you invested or reinvested dividends, gains, etc.

[The Sad Man]

Originally Posted by Gandalf

If you aren't going to use the average cost basis, you need to start keeping careful records of every time you invested or reinvested dividends, gains, etc.

Thanks, Gandalf. This is what I want to avoid, so I'm definitely sticking with single average cost.

[Colymbosathon ecplecticos]

Originally Posted by The Sad Man

I had all my dividends and capital gain distributions automatically reinvested - a dumb move that I just changed now.

Why do you say that that was a dumb move?

The shares that you purchase through dividend and capital gain reinvestment have their purchase price as their basis.

[zeroEthix]

Originally Posted by Colymbosathon ecplecticos

Why do you say that that was a dumb move?

The shares that you purchase through dividend and capital gain reinvestment have their purchase price as their basis.

my thoughts exactly

[The Sad Man]

Originally Posted by Colymbosathon ecplecticos

Why do you say that that was a dumb move?

The shares that you purchase through dividend and capital gain reinvestment have their purchase price as their basis.

Well, not dumb in that I was being cheated out of money or anything. Just dumb because I could have used the cash in better investments.