If you held mutual funds in a taxable account and sold at a profit last year, you’ll owe tax on the gains. In such circumstances, be sure to include reinvested dividends and capital gains distributions from your funds when calculating your cost basis in the funds you sold. This will reduce the tax you owe.
Suppose, for example, you invested $10,000 in a mutual fund several years ago and sold the shares last year for $14,000. You might figure that you owe tax on a $4,000 gain.
However, further suppose that you reinvested $3,000 worth of distributions over the years. Your basis will be $13,000 ($10,000 plus $3,000) so you’d owe tax on only $1,000 in gains, not $4,000, on a sale for $14,000.
