The average cost basis method is a helpful tool for investors who own mutual fund positions that have significantly fluctuated in price over time. By using this method, investors can accurately calculate the cost basis of their mutual funds, and also determine the associated profit or loss when the mutual funds are sold.

For example, if an investor purchased 200 shares of XYZ mutual fund a year ago at $20 per share, the total dollar value invested would be $4,000. An investor who has held this position for 365 days, and has not sold any part of the position, would use the average cost method to determine the cost basis of the 200 shares they own. The cost basis is calculated by adding up the total value of all the investments made into the mutual fund, and then dividing the total cost by the number of shares. In this example, the cost basis of the 200 shares of XYZ mutual fund would be $20 per share for a total cost basis of $4,000.

The average cost basis method is most commonly used in cases of mutual funds with continuous investments over a long period of time. Each purchase of the fund is treated as if it was bought in proportion to the overall value of the fund at the time of purchase. This allows investors to calculate their gains or losses based on the total number of shares they own.

For tax purposes, the value of mutual fund positions is reported as either short-term capital gains or long-term capital gains. Short-term capital gains are calculated on mutual fund positions held for one year or less, with the cost basis being the purchase price of the shares. On the other hand, long-term capital gains are calculated for mutual fund positions held for more than one year and the cost basis seen as the average cost basis. Using the average cost basis method helps investors determine the favorable long-term capital gains rather than the short-term capital gains upon selling their mutual funds.

The average cost basis method is a great tool for investors to track the value of their mutual fund positions. By using this method, they can accurately determine the cost basis of the shares they own, their associated profits or losses, and can ensure they are not taxed too heavily during the sale of their mutual funds.