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How does the return of principal payments affect my cost basis in my mutual funds?

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Steven Potts JD EA
The return of principal complicates your calculation of your basis when it comes time to determine your cost basis when you sell the mutual fund. Generally, your basis in a mutual fund is the original purchase price plus the accumulated dividends reinvested that you have paid through your annual tax filing of dividends and interest. When the mutual fund returns some principal you must track this as a reduction of your basis. It is the taxpayer's responsibility to keep track of their basis in any stock, mutual fund, partnership or S-corporation. It is not the responsibility of your broker, partnership or S-corporation.
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