If we sell shares of a California Tax Free Income mutual fund do we have to calculate & report capital gains?

(Gains on the mutual fund shares.)
We live in California.
The fund company merged with another a couple of years ago, so they say they couldn't send the gain/loss information with the 1099-B & it'll be a pain to calculate.

Yes. You have to pay capital gains taxes on all mutual fund investments held outside of IRA or similar accounts. The tax-free nature of municipal bonds is limited to the dividends you receive.

Have you ever sold shares of the fund before? There are 3 methods of identifying the shares sold. The most common is the average cost method. Once you use this method, you have to keep on using it for as long as you hold that investment. This is the method that fund companies usually report, and it basically means you figure out the average price at which you bought your shares, and figure the gain based on the difference between that and the selling price. (e.g. I bought 100 shares at $1, 100 shares at $2, so my average cost is $1.5). If you sell 50 shares now at $2/each, the gain is $25 ($0.50 times 50 shares)

The easiest method, if you haven't sold before, is the first in first out (FIFO) method. Using my earlier example, you can say that the 50 shares you sold came out of the first shares you bought (i.e. the first 100 at $1). In this case, your gain is $50 ($1 gain x 50 shares).

The other method is specific identification. To do this, at the time you sell, you need to send the fund company a letter saying which shares you are selling. For example, you can say you are selling half the shares that you bought at $2, meaning in this case, you would have no gain.

However, to accurately figure all this out under any method, you'll need your old fund records. It's a good idea to keep at least your annual statements for this purpose, as that should list all your activity. Alternative, MS Money or Quicken can do this for you.

I would expect that the fund that the original fund merged with has the basis for your fund, including the amount on the date of merger, and any added earnings. Should be in your account statements.

If not, go to Yahoo.com Finance and look up the historical prices of the funds in question. Then you will be able to calculate your basis in the fund.

You will need to report capital gains on the sale of the fund. If you have reinvested the fund earnings, add that to your basis.