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Cost Basis Changes
Old 01-18-2013, 10:08 AM   #1
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Cost Basis Changes

I took gains this year from my taxable account I just opened about a year and a half ago from Vanguard. I don't understand why these gains were subtracted from my cost basis. Can someone enlighten me on the mechanics of taxable accounts and changes in cost basis. I am new to these types of accounts as I have always only held most of money in tax deferred.
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Old 01-18-2013, 11:17 AM   #2
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It sounds like you may be automatically reinvesting dividends and gains.
Each and every share of a fund that you own has a basis. If you sold shares to "take gains", then the total basis in the fund is reduced by the basis of the shares sold.

Determining the basis of shares sold is probably a different topic.

When you do automatic reinvestment of dividends and gains, it is best to think of a reinvestment transaction as being paid a dividend or gain, and then immediately using that dividend or gain to purchase more shares because that is precisely what is happening. Those new shares have their own basis.
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Old 01-18-2013, 11:22 AM   #3
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If we are to read this literally, "these gains were subtracted from my cost basis", then it seems that when the sell order was placed it was placed with a "last in first out" directive, or somehow that was the effect of the order placed, and the share price hadn't varied (so the gains were essentially all dividends). Just a guess though. Do you recall how you configured the sell order?
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Old 01-18-2013, 11:31 AM   #4
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I believe Vanguard is using average cost to figure my basis. I have been taking dividends as income. I just recently sold some shares to add to my income because they were above my initial investment and will be able to get them at 0% for tax purposes because I am in the 15% bracket.
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Old 01-19-2013, 06:55 PM   #5
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Look on the sell confirmation, it will say what cost basis was used.
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Old 01-19-2013, 07:27 PM   #6
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Let's say you bought $10,000 worth over time. Before the sale, say it was worth $12,500. If you sold $2,500, you can't skim the gains off the top and leave the basis as $10,000, if that's what you are thinking. Instead, if they used average cost, you liquidated 1/5 of your holdings, so they would reduce the basis by 1/5 of the original basis, or $2000. So, the sale of $2500 had a basis of $2000 and a gain of $500. Your remaining $10,000 has a basis of $8000.

And if some of the shares were purchased in the last 12 months, that fraction would be a short term capital gains (someone correct me if that's wrong) which you don't want because it'll be at your 15% rate, not 0%.

Does that help?
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Old 01-20-2013, 09:58 AM   #7
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Understood. Thank you for your input everyone.
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