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Vanguard Cost Basis Calculation Choices
Old 04-06-2012, 09:40 PM   #1
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Vanguard Cost Basis Calculation Choices

Maybe always was this way, but I noticed on last statement that Vanguard defaults to average costing if you do not tell them.

Other options are FIFO and specific shares identification.

You generally want to do specific shares identification, right ?

Generally, "second choice" would be FIFO ? Or average costing ? Thanks !

https://personal.vanguard.com/jumppa...sis/index.html
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Old 04-06-2012, 09:46 PM   #2
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I have always used Specific ID and never Average Cost.

FIFO is just another way of doing Specific ID ... after all, if you don't specify which shares you sold, then the IRS says you defaulted to selling the First shares you bought (that you still own). The basis of those shares is just the price you paid for them if you do not use Average Cost (that is, it is the price you paid for those shares).

In the past Vanguard has always told me the Average Cost of the shares I sold, but I just ignored it and put the real cost basis on my tax return. Vanguard does not even know that I did not use Average Cost. Of course, the IRS rules have changed, so when I sell (and not before) I will tell Vanguard that I am using Specific ID.
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Old 04-06-2012, 09:58 PM   #3
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I'm lazy, and have always done average cost.
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Old 04-06-2012, 10:14 PM   #4
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I'm lazy, and have always done average cost.
+1 It's not supposed to be the best from a financial standpoint, but I know myself well enough to know that this is the best choice for me.
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Old 04-07-2012, 05:11 AM   #5
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I'm lazy, and have always done average cost.
Makes three of us.
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Old 04-07-2012, 06:59 AM   #6
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I'm lazy too. I had no choice really since I never tracked this stuff for the first 15 years of investing and when I looked into it I couldn't figure out once share from another. With auto-payments for decades there are a lot of transaction to track.

I think I remember a message from Vanguard about a year ago informing us that they would go to default average cost. I think this was related to a new Federal requirement for brokerage firms to provide and report gains information.
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Old 04-07-2012, 08:24 AM   #7
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Originally Posted by LOL! View Post
I have always used Specific ID and never Average Cost.

FIFO is just another way of doing Specific ID ... after all, if you don't specify which shares you sold, then the IRS says you defaulted to selling the First shares you bought (that you still own). The basis of those shares is just the price you paid for them if you do not use Average Cost (that is, it is the price you paid for those shares).

In the past Vanguard has always told me the Average Cost of the shares I sold, but I just ignored it and put the real cost basis on my tax return. Vanguard does not even know that I did not use Average Cost. Of course, the IRS rules have changed, so when I sell (and not before) I will tell Vanguard that I am using Specific ID.

Technically you were doing it wrong... if you do not inform your broker (or in this case Vanguard) that you are selling specific shares you are not... IOW, you can not decide on your own, you have to tell the entity selling the shares...

With the new system in place, that is now easy...
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Old 04-07-2012, 08:30 AM   #8
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Yes, starting with shares bought in 2012, brokers are required to report the basis, so you have to tell your brokerage which of the 3 methods they should use.

Previously, you could use whichever of the 3 methods you liked at the time of sale, but you had to keep up with them yourself. As a courtesy, vanguard and many other brokerages would report the average cost (or was it FIFO?) if you chose to use that method. This still applies to shares bought before 2012.

Specific ID gives you the most control. If the past if you reinvested dividends and cap gains, it could be a lot of work for mutual funds, too much for me to try to keep track of, so I've used average cost (or whatever it was that the brokerage provided me).

Going forward starting in 2012, I'm switching to Specific ID. I'm assuming it's just an extra step at sale time, to select the shares you want to sell, from a list provided by your broker, but I haven't seen yet how it will work. I actually stopped reinvesting divs and CGs because I transfer that income to my bank for retirement income, so I probably won't ever have too many post-2012 shares, unless/until I rebalance or change my investment strategy.
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Old 04-07-2012, 08:58 AM   #9
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Originally Posted by Texas Proud View Post
Technically you were doing it wrong... if you do not inform your broker (or in this case Vanguard) that you are selling specific shares you are not... IOW, you can not decide on your own, you have to tell the entity selling the shares...
TP......actually LOL was correct. see p. 6,8 of Pub 564
http://www.irs.gov/pub/irs-prior/p564--2009.pdf
(don't know why a more current version is not available).

FIFO is the default if nothing special is done and AVB has to be declared on the 1040 forms/schedules in order to take precedent.
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