With regular purchases of a mutual fund over several years how do you calculate your cost basis when selling?

I'm assuming that you are a US citizen and that the mutual fund is not a tax favored account. In other words, the mutual fund is not part of a 401k plan, or 403b or 457 plans.

Technically, you are supposed to keep track of each purchase (including dividend reinvestment). When you sell, you are supposed to break down the proceeds to correspond to the shares purchased.

From the IRS point of view, you may lump all of your purchases that are older than 1 year (at the time of sale) together and also lump all your purchases together that are less than 1 year old at the time of sale. The first thing the IRS cares about is whether the sale is short term or long term. The sale of shares that are less than 1 year old at the time of sale are short term. The sale of shares that are more than 1 year old at the time of sale are long term.

Your basis is the sum of the amounts paid during the appropriate time period. This includes reinvested dividends and reinvested capital gains and any broker commissions paid to acquire the shares. I also include any commissions paid to sell the shares because of the IRS income matching program. Your 1099B shows your gross proceeds. You want the sum of your short term and long term gross proceeds on your Schedule D to match your 1099s. This avoids problems with the IRS.

Well its rather comlicated because you have to calculate how many shares were purchased at each price then divide total shares purchased by total price paid....however its more difficult then that because most peole have dividiends and capital gains reinvested in mutual funds which will further adjust your cost basis.....the good news however is that almost all mutual fund companies calculate this automatically for the share holders

Buy Quicken (or Microsoft Money). Enter all your buys and sells. Let it compute your capital gains for you.