Don't be among the millions of investors who pay too much tax on mutual fund profits. By Kevin McCormally, Chief Content Officer February 24, 2006 A few years ago, the head of the IRS told Kiplinger's Personal Finance magazine that he suspected that millions of investors paid too much tax on mutual fund profits simply because they didn't understand the rules. This is a special threat for the millions of Americans who are new to mutual fund investing. The rules are a lot more complicated than when you keep your money in a bank account. If you sold shares during 2005, you get a 1099-B form from the fund showing how much you got. But the full amount is not taxable. You subtract what you paid for the shares -- your so-called tax basis -- to arrive at the taxable gain. Maybe you even have a tax-saving loss. When figuring your basis, don't forget to include any dividends you reinvested in the fund. Lots of investors forget that and overpay their taxes. If you're not sure about your basis and your records aren't clear, call the fund's toll-free number for help. Most funds now keep track of investors' average basis, and that can be a real help this time of year. For more information about reporting gains and losses, see our Investor Tax Tips.