Vanguard cost basis when selling - which?

[HealthyFuture]

We are beginning to sell shares to shift our asset allocation to be less risky. But since I’ve spent these last decades just accumulating, I’m new to selling anything, including from my taxable accounts.

Vanguard has a ‘minimize tax impact’ option when selecting the cost basis for a fund. I read the definitions of the typical types (FIFO, LIFO, average, etc) and I’m curious how one chooses the most effective cost basis for selling shares, some of which have been held for 25-30 years, and some of which were bought recently (the latter due only to dividend reinvestment).

I selected the minimize tax option for one of my funds and sold a small amount just to see and have a negative capital gain. But I am uncertain how I would know for the next sale in the same fund (or for any other) if that basis is or is not superior to any other and/or how that might inform how much/ what I sell (or vice versa).

Any perspectives to share for VG users who’ve sold taxable shares? How do you assess the cost/ benefit of the different bases?

 

[PaunchyPirate]

It sounds like you might not have your cost basis settings set for Specific ID. If you do this, then when you look at the unrealized cost basis view, you will see how much each and every lot (purchase) of the holding cost you and how much it has gained/lost. You can then pick and choose precisely which lots you wish to sell.

 

[RunningBum]

Don't use average. Once you use it you are locked into it. In most cases it is best to pick the one with the highest basis, to minimize the tax basis as VG suggests. With a loss you can write off other capital gains. If you have no gains or not enough to fully utilize the loss, you get up to a $3000 loss to use against regular income.

There may be some reasons to choose shares with a lower basis. If your income is low enough that you won't tax tax on capital gains, and you have no other use for that tax space such as Roth conversions, you probably want to take as much gains at 0% tax rate as you can. Note that if you are getting an ACA subsidy any gains will reduce the subsidy, so factor that in.

 

[RetMD21]

We are beginning to sell shares to shift our asset allocation to be less risky. But since I’ve spent these last decades just accumulating, I’m new to selling anything, including from my taxable accounts.

Vanguard has a ‘minimize tax impact’ option when selecting the cost basis for a fund. I read the definitions of the typical types (FIFO, LIFO, average, etc) and I’m curious how one chooses the most effective cost basis for selling shares, some of which have been held for 25-30 years, and some of which were bought recently (the latter due only to dividend reinvestment).

I selected the minimize tax option for one of my funds and sold a small amount just to see and have a negative capital gain. But I am uncertain how I would know for the next sale in the same fund (or for any other) if that basis is or is not superior to any other and/or how that might inform how much/ what I sell (or vice versa).

Any perspectives to share for VG users who’ve sold taxable shares? How do you assess the cost/ benefit of the different bases?

What I want is something like a slider where you adjust the % of shares sold from 0-100% and you find out what your gain/loss will be assuming HIFO. Unfortunately Vanguard doesn't have that. Maybe nobody does. Selling specific lots is a pain but that's what I did. I essentially did a manual version of HIFO to minimize taxes. All long term in my case since i switched off dividend reinvestment.

 

[Rianne]

We recently sold single-stock shares purchased before 2010 (taxable). We had no record of the purchase price as they were options provided by the company and purchased in small lots. We knew the years of purchase. We looked back at the history of stock prices for the company and took the average price for that year as the basis.

 

[SecondCor521]

I prefer specific ID, and that is what I've used at Vanguard.

As @RunningBum alludes to, there will be times when you may want to minimize your capital gains, times when you may want to maximize them, and times when you may want some specific amount. What you may want from year to year will depend on your overall tax strategy and that specific year's tax situation.

Taking a set it and forget it approach - as OP may hint at - leads me to think that maybe OP hasn't thought through or understood how much tax management can save them (either specifically with respect to capital gains or more broadly with respect to their entire tax return). It's an important topic and unless you're Warren Buffett it's well worth paying attention to it.

 

[mrfeh]

I selected the minimize tax option for one of my funds and sold a small amount just to see and have a negative capital gain.

There's a chance this was a wash sale: https://www.investopedia.com/terms/w/washsalerule.asp

I suggest you stop and educate yourself on strategies regarding sales. It's all well and good to ask people online, but you need to understand this for yourself.

 

[COcheesehead]

Buying even if it’s a dividend in the same 30 day window and selling for a loss is a wash.

I also recommend selling by specific lot. You can decide what is more appropriate. Last year I gain harvested against prior tax losses and removed all the capital gains from my taxable account with no tax consequences.

 

[HealthyFuture]

Thanks to all who responded. I wasn’t aware that Specific ID was a way to sell, so I will go learn how to do that.

I also wasn’t aware that selling a dividend bought within the preceding month could be a wash sale — makes perfect sense, of course, now that you’ve pointed it out. But re wash sale I had focused on the fact I knew I would not re-purchase after sale, not that I might be selling something I’d just bought through a dividend.

Appreciate the advice. Trying to get some money out of stocks and into treasuries and can’t quite seem to learn everything fast enough.

 

[jimbohoward69]

Don't use average. Once you use it you are locked into it. In most cases it is best to pick the one with the highest basis, to minimize the tax basis as VG suggests. With a loss you can write off other capital gains. If you have no gains or not enough to fully utilize the loss, you get up to a $3000 loss to use against regular income.

Sorry to hijack the thread but I just realized I've been doing it wrong. I started a VG Taxable Brokerage account back in 2019 (VTSAX & VTIAX), contributed here and there, and sold all shares of both in 2021, with the proceeds going back into the settlement fund.

I then started an auto investment twice a month in 2023 (VTSAX only). For the heck of it, I just went to sell some shares and it says "Cost basis: AvgCost". So, even though my share balance in VTSAX was zero before I started the auto invest, I'm "locked in" to AvgCost for that fund forever? I can't get it re-characterized by VG?

 

[RunningBum]

Sorry to hijack the thread but I just realized I've been doing it wrong. I started a VG Taxable Brokerage account back in 2019 (VTSAX & VTIAX), contributed here and there, and sold all shares of both in 2021, with the proceeds going back into the settlement fund.

I then started an auto investment twice a month in 2023 (VTSAX only). For the heck of it, I just went to sell some shares and it says "Cost basis: AvgCost". So, even though my share balance in VTSAX was zero before I started the auto invest, I'm "locked in" to AvgCost for that fund forever? I can't get it re-characterized by VG?

I think as long as you haven't sold any of these new shares, VG would let you change the basis. Try it online and see, and if you can't do it that way give them a call to explain your situation.

 

[PaunchyPirate]

Sorry to hijack the thread but I just realized I've been doing it wrong. I started a VG Taxable Brokerage account back in 2019 (VTSAX & VTIAX), contributed here and there, and sold all shares of both in 2021, with the proceeds going back into the settlement fund.

I then started an auto investment twice a month in 2023 (VTSAX only). For the heck of it, I just went to sell some shares and it says "Cost basis: AvgCost". So, even though my share balance in VTSAX was zero before I started the auto invest, I'm "locked in" to AvgCost for that fund forever? I can't get it re-characterized by VG?

I’m no longer a Vanguard customer so I can’t tell you the exact steps, but go to your account settings and there should be a way to change that cost basis type. You can define each investment individually.

 

[SecondCor521]

Sorry to hijack the thread but I just realized I've been doing it wrong. I started a VG Taxable Brokerage account back in 2019 (VTSAX & VTIAX), contributed here and there, and sold all shares of both in 2021, with the proceeds going back into the settlement fund.

I then started an auto investment twice a month in 2023 (VTSAX only). For the heck of it, I just went to sell some shares and it says "Cost basis: AvgCost". So, even though my share balance in VTSAX was zero before I started the auto invest, I'm "locked in" to AvgCost for that fund forever? I can't get it re-characterized by VG?

You're not necessarily locked in. Vanguard just defaults to average cost and you haven't changed it yet.

To change:

Log in
My accounts / Account information / Profile and account settings at the top
Accounts and trading in the middle on the right
Cost basis method first column, third choice
Scroll to the account you want
"Change cost basis methods" on the right

As someone else said, if you can't change it online, then you should be able to call and ask Vanguard to change it as long as you were at a zero balance, then bought shares and haven't sold any since you were at a zero balance.

 

[jimbohoward69]

I think as long as you haven't sold any of these new shares, VG would let you change the basis. Try it online and see, and if you can't do it that way give them a call to explain your situation.

I’m no longer a Vanguard customer so I can’t tell you the exact steps, but go to your account settings and there should be a way to change that cost basis type. You can define each investment individually.

Thank you both! Yes, I was able to change the cost basis to SpecID on the website. Never knew that was an option. Much appreciated!

 

[jimbohoward69]

You're not necessarily locked in. Vanguard just defaults to average cost and you haven't changed it yet.

To change:

Log in
My accounts / Account information / Profile and account settings at the top
Accounts and trading in the middle on the right
Cost basis method first column, third choice
Scroll to the account you want
"Change cost basis methods" on the right

As someone else said, if you can't change it online, then you should be able to call and ask Vanguard to change it as long as you were at a zero balance, then bought shares and haven't sold any since you were at a zero balance.

I was typing my reply when you posted. Thank you as well!

 

[Texas Proud]

Another thing that I did was stop reinvesting my dividends... IOW, use them for cash needs for expenses... that is if you are already spending down your investments...