Beware of application of average cost

[samclem]

Quote:

Originally Posted by pb4uski One thing to be sure of is that your basis and Vanguard's basis are the same before proceeding. Because I use average cost across covered and uncovered shares, for a few tickers my basis differs from Vanguard's so I'll have parallel records in Quicken that differ from Vanguard until all my uncovered shares have been sold. After that, once all the shares are covered shares they should align.

But you've only sold uncovered shares, and you've used the "average cost" basis for them, right? Say you changed to Spec ID right now as far as Vanguard was concerned. I think Vanguard won't be reporting any cost basis to the IRS for sales of your uncovered sales, they'll send you a 1099-B at tax time with the cost basis of these uncovered shares that assumes they were sold using the average cost basis. That's what I'll report to the IRS, since that's the cost basis I've historically used for these uncovered shares. But, as I understand it, if you also want to sell some (recently purchased, higher cost basis) >covered< shares today using the Spec ID method to tax loss harvest, you can do that, too, and the 109-B VGD sends to the IRS (and you) on these shares will be accurate reflections of the prices you paid for those exact shares.
As a backup I'll record a "snapshot" of the average cost basis of my uncovered shares in all my taxable funds as of today. That'll be the share price I'll continue to use going forward when I specifically identify these uncovered shares for sale in the future.
This use of different cost basis methods (separate for covered and uncovered shares) appears to be countenanced by IRS rules.

As usual, everyone should do their own research and consult a professional. I'm a random guy on the interwebs with no particular expertise in this stuff.

[MichaelB]

Here's a Q&A from the IRS that might be of interest Cost Basis Reporting Overview and FAQs One example

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52. How is an averaged basis determined for mutual fund or DRP stock when some of the shares are covered securities and some are noncovered? Beginning in 2012, the regulations treat mutual fund and DRP stock that is a noncovered security as being held in a separate account from stock that is a covered security. Because stock is averaged on an account-by-account basis starting in 2012, the basis of shares that are covered securities will be the average basis of only the covered securities and the basis of the shares that are noncovered securities will be the average basis of only the noncovered securities. However, if a broker has accurate basis information for shares that are noncovered securities and makes a “single-account election” for some or all of the shares, the shares subject to the single-account election are treated as covered securities and their basis is averaged with the shares that are covered securities.

[pb4uski]

Quote:

Originally Posted by samclem But you've only sold uncovered shares, and you've used the "average cost" basis for them, right? ...

Not exactly. I use average cost across all shares (non-covered and covered shares combined - the typical application of average cost before this covered/non-covered crap started).

Vanguard uses average cost separately for non-covered shares and for covered shares. For sales, it reduces non-covered shares at average cost first and once all non-covered shares have been sold it reduces covered shares (consistent with the two separate accounts in the previous post).

For any tickers where I have sold a portion of non-covered shares my remaining basis will be different from what Vanguard shows for the non-covered shares due to the difference in approaches.

Luckily I have only a few tickers where my cost basis differs from Vanguard's and now that the 0% capital gains rate is permanent I plan to do some gains harvesting and eventually our records will align.

[grasshopper]

I found a big price difference in older shares of my 2 year bucket VFSUX, so I switched to Spec-ID. Everything else is covered now that I took a bunch of LTCG in 2012. I reconciled cost between Quicken and Vanguard .01 difference. Going on 4 years without touching my 2 year bucket.

[samclem]

For those considering more frequent selling and buying for the reasons we've discussed, another factor to consider: fund-imposed restrictions on buying after selling. For most Vanguard funds the wait is 60 days. A two-month delay on getting back into a fund will get the clock started later for purposes of establishing LTCG status.

There may be workarounds for this--Vanguard waives the 60 day restriction for some types of purchases, including:
- "Transfers and re-registrations of shares within the same fund."
- "Conversions of shares from one share class to another in the same fund."
- "Purchases of ETFs"

Of course, if we held the funds as ETFs in the first place there would be no trading restriction issue. Something to think about . . .