I got an email from Vanguard about their upcoming changes in cost basis reporting. Here's the web page
Beginning later this year for stocks and ETFs purchased through Vanguard Brokerage—and later in 2011 for mutual fund shares—we will offer the following calculation methods:
- Average cost. Calculates the average cost per share for each share you own. (Available only for mutual fund shares and dividend reinvestment plans.)
- First in, first out (FIFO). Shares with the oldest purchase date will be sold first.
- Specific identification (Specific ID). You choose the shares (or lots) to sell to realize a capital gain or loss.
- Last in, first out (LIFO). Shares with the most recent purchase date will be sold first.
- Highest in, first out (HIFO). Shares with the highest purchase price will be sold first.
- Minimum tax (MinTax). Shares will be sold to realize the lowest taxable gains. This method realizes long-term gains before short-term gains.
Until now I've always used the Average Cost method because it is too much hassle (whine, whimper) to do otherwise. Now it looks like it will be considerably easier (I'm assuming Vanguard will set up some online method to identify the specific shares for the Specific ID method, eliminating the present need for a letter).
Of course, the devil will be in the details. And apparently the changes in reporting only affect newly-purchased shares. For those accumulating funds in taxable accounts, and who have "spoiled" an account by withdrawing under one of the methods above (thus locking yourself in to that cost basis accounting method) it might make sense to open a fresh account for your new contributions, thus starting with a clean slate and gaining the most benefit from the newly offered reporting options.
At any rate, the new reporting methods will allow the laziest among us to take advantage of the smart tax-loss harvesting methods that the sharp-pencil crowd have been using for years.
I assume other fund companies are making the same changes.