Selling mutual funds must be reported in your income tax return for the year of sale as a gain or loss. The issue is: What is the basis that will be tax free? Obviously, the initial investment will be the first basis figure. Each dividend or capital gain reinvestment on that fund will be added to the basis. The total of the original investment and all of the reinvestment funds will be divided by the total number of Fund shares held to determine the actual basis of the shares sold, whether you sell only a small portion of the shares or all of the shares. The basis for the shares sold (less than all) as reported on that year's income tax must be deducted from the basis in the mutual fund. It is obvious that you have to keep careful records on a Fund that you have held for a number of years. I've found that Quicken handles this very nicely if you post all of the reinvestments and partial sales as they are made to you. If you don't keep records, you or your heirs will be paying the government more tax money than they're entitled to. But then again, someone has to take care of the deficit and it might as well be those mutual fund holders who don't keep records.