facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Cost Basis Is Different From Return Thumbnail

Cost Basis Is Different From Return

Investor brokerage statements sometimes show a “cost” for an investment in addition to its value. For example, a year-end Vanguard account statement for an investment in the Wellesley Income mutual fund shows the following:

Symbol

Fund Name

Average Price Per Share

Total Cost

Value on 12/31/16

VWINX

Wellesley Income Fund Inv.

$25.56

$28,638.94

$28,534.98

At first glance, the total cost of $28,638.94 exceeds the value of $28,534.98 on 12/31/2016, so you might think you “lost” money.  But what does “cost” mean in this case?  The cost shown on the account statement is the “tax cost” of the fund (also known as cost basis).  It is used for calculating capital gains for tax purposes when you eventually sell the fund.  The cost basis includes your purchases (what you put into the fund), as well as all the dividend and capital gain distributions that you reinvested into the fund.  You pay income tax on these each year, and since the distributions were used to buy more shares of the same investment, they add to the cost basis for the fund.  If you took the distributions in cash, you would still pay tax on them, but they would not add to cost basis for the fund.

The table below shows the initial purchase and all the various distributions through the end of 2016.

Date

Transaction Description

Share Price

Shares

Total Amount

5/12/2014

Initial Purchase

25.61

979.312

$25,080.17

6/20/2014

Dividend Received

25.91

6.841

$177.26

9/19/2014

Dividend Received

25.83

7.025

$181.45

12/17/2014

Dividend Received

25.34

8.623

$218.50

12/17/2014

Long-term Capital Gain

25.34

16.814

$426.07

12/17/2014

Short-term Capital Gain

25.34

0.901

$22.84

3/26/2015

Dividend Received

25.58

6.895

$176.38

6/19/2015

Dividend Received

25.43

7.265

$184.75

9/18/2015

Dividend Received

24.71

7.864

$194.33

12/16/2015

Dividend Received

24.59

9.403

$231.22

12/16/2015

Long-term Capital Gain

24.59

25.159

$618.67

12/16/2015

Short-term Capital Gain

24.59

0.635

$15.62

3/16/2016

Dividend Received

24.96

6.988

$174.43

6/16/2016

Dividend Received

25.7

7.886

$202.66

9/16/2016

Dividend Received

25.9

7.376

$191.03

12/23/2016

Dividend Received

25.46

9.755

$248.37

12/23/2016

Long-term Capital Gain

25.46

11.189

$284.86

12/23/2016

Short-term Capital Gain

25.46

0.406

$10.33

Total:

$28,638.94

The Total in this table is the same as the Total Cost shown in the summary statement excerpt above.  It is what you would report to the IRS as the cost basis of the fund if you decided to sell it.

But what did you actually earn on the investment?  The only money you contributed is the initial purchase of $25,080.17 on May 12, 2014.  All reinvested dividend and capital gain distributions afterward were part of the investment earnings.  As shown in the chart below (from the Vanguard website for the account), the total investment returns through December 31, 2016 were $3,454.81.  Adding these two together gives December 31, 2016 account value of $28,534.98 from the first table.

So, the total return from May 12, 2014 through December 31, 2016 was $3,454.81.  This is 13.78 percent over a little more than 2 ½ years ($28,534.98/$25,080.17 -1)x100.  This corresponds to an average annual rate of return of about 5 percent during the period from May 2014 through December 2016.