The government is not concerned if you lose money on your investments, but it does want its share of the profit if you sell your assets. You must also pay income taxes if your investment paid a dividend, even if the dividend was reinvested to purchase additional stock. If the stock or fund went down in price to less than you paid for it but still paid a dividend, the dividend income must be reported. Use the IRS 1099-DIV form to report dividends and income.

Prepare a record-keeping worksheet for each stock and/or mutual fund you purchase or own. Record date of purchase, dollar amount spent, number of shares purchased, and commission paid, if any, because this is part of the cost of the investment. Also list the address of the company, the toll-free number of their customer service department, and other information that you feel is important.

You will want to keep each quarterly statement until you receive the annual statement. Record the new information from each quarterly statement on your Investment Record worksheet.

By monitoring your investments you will be able to determine how much it is increasing or decreasing in value and be able to make informed decisions about buying more or selling.

Now for the hard part. When you sell a stock or mutual fund, you must know the tax basis for the shares you sell. This information will come from your records. It can be reported in one of three ways, but whichever way you start reporting for a specific investment, you must report that way as long as you own that investment. The methods you can use to determine the tax basis are:

• First in-first out. You sell the shares in the same order you bought them, selling the oldest shares first.

• Specific identification. You redeem specific shares and get a confirmation of the sale in writing. This helps you balance profit and loss from one year to another.

• Average basis. You calculate the total cost of your shares, regardless of when you purchased them, and divide that total by the total number of shares purchased. If you bought 100 shares at $20, another 100 at $25 and 100 at $15, your average would be $20 per share. This gets more complicated if you reinvest dividend and interest payments. Some funds now inform shareholders of their average basis. If yours does, this is the easiest way to keep records. If they don't, it's probably the most difficult. The financial computer program Quicken is able to determine the average share basis for you automatically.

• Unless your stock or mutual fund is tax-deferred, you will be taxed each year on your earnings. Be sure to keep track of the taxes you paid, because this can be deducted from your capital gains when you sell. Don't be taxed twice.

• If you inherit the security, your tax basis is the price of the asset on the day the former owner dies. However, if the asset was a gift, your basis is the same as the basis of the former owner, and that can mean a lot of paperwork for you if the former owner did not keep good records. You can call the customer relations department of the company and ask for a copy of the former owner's records. Some will provide a summary of all purchases and dividend reinvestments for a given investment over several years. You can figure the tax basis yourself or pay an accountant to do it for you.