If you sold stocks or mutual funds last year, in a taxable account, gather your records before you start to prepare your 2007 tax return. For tax purposes, "sales" include mutual fund switches between funds offered by the same company.
The higher your "basis" (cost for tax purposes) in the securities you sold, the lower your capital gains or the greater your capital loss. Therefore, you’ll come out ahead by adding any reinvested dividends and reinvested capital gains distributions to your basis.
Suppose, for example, you bought a mutual fund for $10,000 a few years ago and reinvested $2,000 worth of distributions over the years. Your basis is $12,000.
If you sold all your shares in that fund last year for $15,000, your taxable gain is $3,000: $15,000 sales proceeds minus your $12,000 basis. If you don’t include your reinvestments, you’d report a $5,000 gain and pay more tax than you should pay.
