Disclaimer: No one here is my accountant and nothing in this thread is financial advice. I’m just looking for some info.
Back in the 90s I purchased a mutual find direct from the Mutual Fund company (that was a thing in the 90s that I don’t think they do anymore). Let’s say I put in $2500 over the course of a year (just making up numbers). I kept it and held it for a very long time. Last year I sold it for $2900.
Here is my question: when I do my taxes this year am I going to pay taxes on the $2900 or just the profit I made, $400? The 1099 I got only provides the amount I got (understandably), do I need some kind of paperwork to prove what I paid in? Does the fact that I paid in over a period of time or so long ago matter? I am not sure how this will work.
This is new to me so I appreciate any information people more familiar with how this works can provide. Thank you.
Remember that if you, like most people, had your dividends reinvested, that means that you bought more shares each time a dividend was declared. You need to add your dividends to the amounts you paid originally in this case.
Slight complication: you need to separate the shares you bought less than a year before you sold them from the shares you bought more than a year before you sold them, including the shares purchased with dividend reinvestments. The shares you held for one-year or less get short-term capital gains treatment. The shares you held for more than one year get long-term capital gains treatment.
Yes, until recently brokers were not required to track your “basis” (how much you paid for the shares). For those shares, you are required to retain proper records to prove your basis should the IRS ask.
Did you reinvest dividends or capital distributions? That can make things more complicated, since you now have multiple small purchases. These days most places will track the basis, but I’ve had to reconstruct the basis for old holdings. How to Figure Out Cost Basis on a Stock Investment
Yes, you only owe tax on the gain, not the entire proceeds. The formula is sale proceeds less cost basis equals gain or loss.
It will make things easier if you have a full history of not only your original purchase(s), but also all the yearly reinvested dividends, if you had dividends reinvested automatically as most people do. I keep a spreadsheet of my mutual funds, showing the initial investment and each addition due to dividends to come up with the cost basis. If you don’t have a full history, you can piece it together if you know when you purchased your shares and look at the dividend history. The IRS allows you to make a reasonable, good-faith estimate if you lost the records, but you should be able to show the effort you made to find the data.
You don’t need to have any paperwork. But it would be helpful if you ever got audited! If you have the receipts etc. that would be good. A situation like this is very unlikely to increase your risk of an audit, however. I will echo everyone else, $400 or your non-hypothetical number.