A. If you are selling your entire investment in a fund, and you have not sold any shares of this fund in the past, you do not need to consider the 4 methods – they will all provide the same result.
You indicate that you know you have to include the reinvested dividends in your basis. If all of the dividends and distributions you received from the fund over the years were reinvested then the amounts reported in box 1a (Ordinary Dividends) and Box 2a (Total Capital Gain Distributions) of the Form 1099-DIVs represent your dividend reinvestment and should indeed be added to your original investment to determine your cost when calculating the capital gain.
The amounts reported in Box 1b (Qualified Dividends) are already included in Box 1a (Ordinary Dividends) and should not be added to your cost. Similarly, any amounts reported on Lines 2b, c and d are already included in Box 2a (Total Capital Gain Distributions) and should not be added to basis.
You would reduce the amount of Qualified Dividends and Capital Gain Distributions by any amounts reported in Box 4 (Federal Income Tax Withheld), Box 5 (Investment Expenses) and Box 6 (Foreign Tax Paid).
If the dividends and distributions were not always reinvested, or only certain distributions were reinvested (i.e. ordinary dividends paid in cash and capital gain distributions reinvested), then you should only add the actual amounts reinvested to your cost basis.
Amounts reported in Box 3 (Nondividend Distributions) generally represent a return of capital and are basically a wash (you would add the amount of the distribution to basis as a reinvestment, but then subtract it out as a return of capital) and should not be added to your cost. You would not have included these distributions in income on your Form 1040 in the year(s) received
Basically your cost basis is the original investment in the fund, plus any additional share purchases and the net amount of total dividends and distributions reinvested, less any distributions classified as a return of capital.
It would be helpful to review the annual fund statements showing all activity for the year when determining your cost basis. You should be able to reconcile the Form1099-DIVs to these statements.
If your capital gain is substantial enough, and you will not be covered under the “safe harbor”, you may want to consider making federal and state estimated tax payments to “cover your arse” and avoid potential underpayment penalties.
A substantial long term capital gain, while taxed separately under both regular tax and the dreaded Alternative Minimum Tax (AMT), may also cause you to become a victim of AMT.
I hope I have been of help.