When you sell shares of a mutual fund, include any reinvested dividends and capital gains in your “cost basis.” This will reduce your taxable gain or increase a taxable loss.
If you’re selling some shares from one fund, bought at different times, specify that higher-cost shares to be sold. This tactic also will generate a smaller gain or a larger loss.
For example, you might write to your broker, “Please sell the 500 shares of XYZ Growth Fund that I bought on August 31, 2002.” If you’re not using a broker, write to the fund company.
Either way, make sure you give these directions before the sale takes place. Keep a copy of the confirmation letter you receive.
Generally, you should sell shares held more than a year because any profits will be taxed no higher than 15 percent However, you should specify short-term holdings instead if those shares have lost value or if you have only token gains on them.