When you sell your shares, it generates a capital gain or loss that you must report to the IRS. To figure out your gain or loss, you have to know the amount you have invested in the shares, also known as your cost basis.

Cost basis is the amount of money you have invested in your shares. It includes any sales charges or redemption fees you paid for the shares upon purchase or sale. It also includes any reinvested dividend or capital gain distributions that you used to purchase more shares. 

An exchange is considered a sale of shares in one fund and a purchase of new shares in another, so two things occur. First, the sale of the original shares will result in either a capital gain or loss, depending on your cost basis in the shares. Second, the amount you receive from the sale and reinvest in the new shares will give you a new cost basis. 

• Keep Your Records. It is your responsibility to keep accurate records of your mutual fund transactions. You will need this information when you file your income taxes, because you must report any capital gains or losses you incur when you sell shares. 

If you reinvest dividends or capital gains distributions, you are purchasing additional mutual fund shares. Retain all records of such reinvestments, because the amount reinvested should be added to your cost basis.

Keep any confirmation statements from the mutual fund company that show complete information for each purchase, sale or exchange, including the date, the number of shares, price per share, dollar amount and any fees or commissions in each transaction. Your year-end statements also will be helpful in calculating your tax obligations.

• Tax Forms. The fund company will provide you with a tax statement of your dividend and capital gains distributions for the year on IRS Form 1099-DIV. Proceeds from a sale are reported on Form 1099-B. You must report these on your taxes. Since the IRS receives a copy as well, you could pay a penalty if you neglect to report them.