Cost basis
Cost basis
Cost basis
Cost basis information How we report your cost basis information Cost basis doesn't equal performance Covered and noncovered shares Cost basis methods available at Vanguard Minimum tax method Specific identification method Highest in, first out method First in, first out method Average cost method
If it's not performance, what is it?
Some investors believe that when they reinvest dividends or capital gains—meaning they use the proceeds to buy more shares of the investment—that distribution becomes part of theirinvestment return.
But here's what really happens: When the distribution is reinvested, it's added to your cost basis. Although the money was "earned" on the original investment by way of a distribution, it's not considered part of the investment's performance. Instead, the number of shares you own increases, as does the cost basis for those shares.
For this reason, cost basis should be used only to calculate capital gains and losses for tax-filing purposes—not to measure performance.
Consider this hypothetical example
Let's say you invest $10,000 in Mutual Fund A and $10,000 in Mutual Fund B on the same day. The $10,000 investment is the original cost basis for each fund.
Original cost basis
| MUTUAL FUND A | MUTUAL FUND B | |
| Initial investment | $10,000 | $10,000 |
| Price paid per share | $10 | $10 |
| Number of shares | 1,000 | 1,000 |
| Original cost basis | $10,000 | $10,000 |
During the first year, the value of Mutual Fund A goes up $1,000 because of market gains, but the fund pays no dividends. So Mutual Fund A ends the year with a balance of $11,000.
Mutual Fund B, on the other hand, experiences no market gains but earns $1,000 in dividends, which are reinvested. The year-end account value, however, is the same: $11,000.
Account activity
| MUTUAL FUND A | MUTUAL FUND B | |
| Initial investment | $10,000 | $10,000 |
| Increase from market appreciation | $1,000 | $0 |
| Dividends paid & reinvested | $0 | $1,000 |
| Price per share for reinvested dividends | — | $10 |
| Number of shares purchased with reinvested dividends | — | $100 |
| Year-end account value | $11,000 | $11,000 |
Here's where cost basis and personal performance start to differ.
When Mutual Fund A's price increased, the value of the account increased to $11,000—but the cost basis remained steady at $10,000. The additional $1,000 is considered unrealized appreciation, whichcanbe interpreted as performance.
But when Mutual Fund B's dividends were reinvested, the cost basis increased to $11,000 because the dividends were used to buy more shares and treated like any other investment made inthe fund.
Year-end cost basis
| MUTUAL FUND A | MUTUAL FUND B | |
| Year-end account value | $11,000 | $11,000 |
| Number of shares | 1,000 | 1,100 |
| Price per share | $11 | $10 |
| Capital gain | $1,000 | $0 |
| Year-end cost basis | $10,000 | $11,000 |
This hypothetical example doesn't represent any particular investment.
