The Importance of Tracking Cost Basis

The cost basis of an investment is an important number to keep track of. Many mutual fund investors fail to keep track of cost basis and it ends up causing problems in the future. Here is the importance of tracking cost basis and why you will want to start doing so as an investor.

Cost Basis

The cost basis of an investment is equal to the amount you paid for the security when you purchased it. Keeping track of this number is critical to your success as a trader in mutual funds. Many people take for granted that this information is tracked and they therefore believe that it is not necessary for them to track their costs. While this may be true, you do not want to leave your financial future in the hands of anyone else, even if it is your broker. Therefore, you should always keep track of your own cost basis on every transaction that you take.

Tax Implications

One of the most important reasons to keep track of your cost basis is because of the tax implications involved. Capital gains taxes are based upon the difference between the purchase price and the selling price. It is usually easy to determine the price of a recent stock because they are posted and readily available. However, you will also need to know the original purchase price of the stock in order to file your taxes correctly. Otherwise, you could be in violation of tax law and it could result in significant fines in the future.

At the end of the year, it seems like everyone starts to scramble for the information from their broker on cost basis. They call their financial adviser and request detailed yearly statements. The broker then calls the mutual fund company and asks for the same information. With as many investors as there is in a mutual fund, this can be a very big administrative task for the mutual fund staff to handle and you may not receive the statements that you request in a timely manner. While you may be waiting for information from a broker, that does not necessarily mean that you can go past your tax filing deadline. This could result in late fees on your taxes and other serious problems.

Keeping Track

This situation can be entirely avoided by keeping track of your own cost basis on your mutual fund shares. Tracking it in a spreadsheet is very simple and you will not have to rely on someone else for your information. When you need access to the cost basis information, you can simply pull up the file and print. This is much simpler than trying to contact your mutual fund provider and ask them for the information. It will help you file your taxes on time and track your performance on your own.

There are also special software programs that can help you stay on course and track your cost basis properly. Be sure to research various programs and make sure they are both user friendly and accomplish what you need. 

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