Take the Tax Bite Out of Mutual Funds
The basis of accounting for investments can make a big difference in managing tax gains and losses on mutual funds.
“Capital gains” are profits you make from selling property held for business or investment. Gains from property held up to a year are classified as “short-term” gains. Gains from property held for more than a year are classified as “long-term” gains. 
To calculate your gain, start with “adjusted selling price.” This generally equals sale price, minus any cost of sale (commissions, etc.) Then subtract your “basis.” Under the average cost method of accounting, the cost would be the average per share. This generally equals your purchase price, plus commissions, sales taxes, improvements, and the like. The resulting difference will be your gain. 
Many large clearing houses offering mutual funds opt for the average cost basis of accounting.  Essentially to determine the cost of any shares sold, the fund manager adds up the cost of all the shares owned in the mutual fund. This cost is then divided by the total of all the shares owned resulting in an average cost per share. Finally the number of shares sold are multiplied by this average cost. Using the average cost method means that investors do not have a say in which shares are sold. For most investors, the ability to specify which shares are sold allows them to plan the timing and amount of their gains and losses and the ability to determine whether the gains are long term capital gains. 
One alternative to this is to invest instead with a clearinghouse that offers the ability to use the "tax lot basis of accounting." This method of accounting allows the investor to use record keeping to track the holding period and actual cost basis of shares that are sold in the mutual fund. In this way, investors are better able to control the timing of which gains, losses and holding period they wish as part of their overall tax plan. 
Courtesy of American Institute of Certified Tax Planners, October 24, 2018
 I.R.S. Pub. No. 550, Investment Income and Expenses (2017), https://www.irs.gov/publications/p550.
 Glen Janken, Default Taxation The Hidden Cost of Mutual Fund Investing, Journal of Financial Planning, (October23,2018,2:18pm),
 I.R.S. FAQ Mutual Funds (Costs, Distributions, etc.) 1 (October 23, 2018),
 Investopedia, Tax Lot Accounting, (October 23, 2018),