Cost Basis on Vanguard Acts.

[modhatter]

Can any of you explain what "cost basis" you chose to use. On Vanguard Act., your choices are

Average cost
First In First Out
Specific ID

Which do you prefer and why?

 

[RunningBum]

Spec ID. Best way to control gains and losses if your purchases were at variable prices.

 

[Fean]

Use specific ID if it is a taxable account. That will make it much easier for you to control capital gains and losses. If it is a tax deferred account, it probably doesn't matter as much.

 

[LOL!]

Spec ID. Best way to control gains and losses if your purchases were at variable prices.

+1

Plus then I don't have to learn different cost basis methods for ETFs, stocks, and mutual funds.

BTW, Average Cost means shares are sold First-In, First-Out. Average Cost only applies to mutual funds, too.

And Spec ID means one can choose the First-In, First-Out shares if one wants to.

 

[RunningBum]

BTW, Average Cost means shares are sold First-In, First-Out.

No. The only thing close to this is that non-covered shares are sold before covered shares, but that's not what FIFO means, especially WRT to covered shares that VG is asking about.

 

[LOL!]

I think you are conflating Cost Basis and which shares are sold.

I keep them separate.

From IRS Publication 550, page 46 (my underline):

Average basis method illustrated. Table 4-2 illustrates the average basis method of shares sold, compared with the use of the FIFO method to figure cost basis (discussed earlier).
Even though you include all unsold shares of identical stock in an account to compute average basis, you may have both short-term and long-term gains or losses when you sell these shares. To determine your holding period, the shares disposed of are considered to be those acquired first.

Also, only Canadians can figure out their average basis. In the US, most investors simply let the mutual fund company do it for them because anytime one sells shares or buys more shares, then the per-share basis of previously-owned shares changes.

With FIFO and Specific ID, the cost basis of any shares bought is the price paid for them which means the per-share basis doesn't change in mysterious ways.

Vanguard lists some pros and cons:

https://investor.vanguard.com/taxes/cost-basis/methods

Note that Vanguard has to keep track of details for you, so no cost basis method has any more record keeping than the others. That's why Vanguard uses the phrase "May require" and not the phrase "Will require" on that web page.

 

[LOL!]

With FIFO and Specific ID, the cost basis of any shares bought is the price paid for them which means the per-share basis doesn't change in mysterious ways.

... unless one creates wash sales which means the basis of shares left in the account are adjusted for the disallowed loss.

Don't ask me how a wash sale messes up Average Basis. I wouldn't even know how to begin to do those calculations.

 

[pb4uski]

Use specific ID if it is a taxable account. That will make it much easier for you to control capital gains and losses. If it is a tax deferred account, it probably doesn't matter as much.

+1

 

[PoF]

Definitely SpecID. I've done some serious tax loss harvesting already this year, and we're not even 3 weeks into January.

 

[Gone4Good]

... unless one creates wash sales which means the basis of shares left in the account are adjusted for the disallowed loss.

Don't ask me how a wash sale messes up Average Basis. I wouldn't even know how to begin to do those calculations.

If it's done correctly the new shares you purchase just inherit the cost basis of the old shares you sold.

 

[Gone4Good]

Can any of you explain what "cost basis" you chose to use. On Vanguard Act., your choices are

Average cost
First In First Out
Specific ID

Which do you prefer and why?

It might help to explain how each method is calculated and why one might choose it.

Average Cost - The tax basis (or cost) of your shares is the average price you paid for all shares. If you bought two lots of equal amounts of stock, one at $100 and one at $200, your tax basis would be $150. If you sold a share at $200, you'd have a taxable gain of $50.

This used to be the most common way for individuals to calculate their basis because it's easiest to keep track of. But with computers, it no longer offers that benefit.

Specific ID - You get to choose the specific shares you sold. So in the example above, if you sold one share you could choose to sell the shares you bought at $100 and realize a $100 gain or choose to sell the $200 shares and realize $0 gain.

The benefit of this method is that you have more control over how you realize gains or losses.

FIFO - a.k.a. First In First Out. You sell the first shares you purchased first. So in the example above, you'd sell the $100 shares and record a $100 gain.

The reason to use this method is . . .

Edit to add: Vanguard doesn't have a complete history of your costs. So you still might need to have records of every share purchase / sale (including dividend reinvestments) to use Specific ID.

 

[RunningBum]

.

Edit to add: Vanguard doesn't have a complete history of your costs. So you still might need to have records of every share purchase / sale (including dividend reinvestments) to use Specific ID.

They do, they just don't show it to you. They have always provided me with average cost for non-covered share sales. If you want to use something else for non-covered (bought before 1/1/12) mf shares you have to track it yourself. Maybe there was a time when they didn't do this, and almost certainly not for shares transferred in, but I've been with them ~20 years and they've always had it.

For covered shares, bought since 2012, they have to report it to the IRS and they show you the info as well.

Since the OP was asked by VG, these are obviously covered shares, because they do not ask for non-covered shares.

 

[Gone4Good]

They do, they just don't show it to you. They have always provided me with average cost for non-covered share sales. If you want to use something else for non-covered (bought before 1/1/12) mf shares you have to track it yourself.

For all practical purposes we're saying the same thing.

Vanguard will calculate the average cost for you because they've tracked that forever. And they've tracked that forever because it's easy to do. To calculate average cost they don't have to keep a running list of every purchase you've ever made. All they have to do is average new transactions into the average cost of your existing shares.

For example, if I've made 1,000 purchases over time at all different prices with an average cost of $100 and then I buy 1000 new shares at $200, my new average cost is $150. The math is simple. But if I want to use specific ID I (or Vanguard) needs to monitor all of those 1,000 purchases and every subsequent sale. That's a P.I.A. and if you weren't doing it yourself before 2012, Vanguard can't help you recreate that history because they almost certainly don't have it.

Since the OP was asked by VG, these are obviously covered shares, because they do not ask for non-covered shares.

Probably. But I know you can still use specific I.D. at Vanguard even for uncovered shares. And they asked you to pick a cost basis method even if you have uncovered shares. I'm not sure if they forced everyone to choose on a certain date or if there are still folks who haven't been forced to designate a method because they've never sold shares until now.

 

[LOL!]

For example, if I've made 1,000 purchases over time at all different prices with an average cost of $100 and then I buy 1000 new shares at $200, my new average cost is $150. The math is simple.

But what if you had bought 1000 times and sold 50 times over the last 10 years. Is the math still simple?

With specific id, it doesn't matter how many times I've bought and sold. There is no math at all. I just decide which shares to sell and look up the cost I paid for them. That is my cost basis.

 

[Gone4Good]

But what if you had bought 1000 times and sold 50 times over the last 10 years. Is the math still simple?

With specific id, it doesn't matter how many times I've bought and sold. There is no math at all. I just decide which shares to sell and look up the cost I paid for them. That is my cost basis.

Yes, the math is still simple with average cost.

If my cost basis is $100 per share, and I sell some shares, my cost basis is still $100 per share in my remaining shares. There's actually no math at all when you sell shares with average cost.

And technically you're correct that there is no math involved with specific id. What there is instead is the book keeping burden involved in tracking every purchase (sometimes monthly with dividend reinvestments) and tracking which purchases or partial purchases you sold with every sale for every security you own forever and until the end of time.

Computers make that bookkeeping easy today (provided you have good, non-Quicken, financial software ) but it used to be a huge P.I.A. So much so that Vangaurd didn't even do it for individual investors until they were told they had to beginning in 2012 (I think).

 

[RunningBum]

I'm looking at a 2012 1099-B and for a sale of VTSAX during the year, it shows a purchase date of 9/26/2006. They also have to keep track of when shares move from ST to LT cap gains/loss. I think they kept all the transaction data, but they just didn't externalize it or let you specify which shares you were selling and report it that way.

In fact I can see a 10 year history. Maybe for shares held longer than that they just kept the average. Maybe.

 

[Gone4Good]

Now that we started talking about the mechanics of Specific I.D. vs. Average Cost basis accounting I have a question:

How did folks using Specific I.D. manage their cost basis when Vanguard promoted a fund you own from Individual Investor Shares to Admiral? They're different funds with different tickers and different NAVs.

With average cost the transition is easy. If my cost basis for all my Investors shares is $100K it's still $100K in my Admiral shares. I just divide $100K by the new number of Admiral shares I have to calculate my per-share cost basis.

But with Specific I.D., I'm comparing the Investor shares I bought with the Admiral shares I now own making gains and losses nearly impossible to figure.

 

[Gone4Good]

I'm looking at a 2012 1099-B and for a sale of VTSAX during the year, it shows a purchase date of 9/26/2006. They also have to keep track of when shares move from ST to LT cap gains/loss. I think they kept all the transaction data, but they just didn't externalize it or let you specify which shares you were selling and report it that way.

In fact I can see a 10 year history. Maybe for shares held longer than that they just kept the average. Maybe.

It's possible they have all that data. I'm not sure why they'd hide it from investors though.

Isn't it just as possible that their systems were designed to keep only the information they needed to keep, like purchase date and average cost but didn't maintain all the nitty-gritty detail. Remember, computer storage costs weren't always as cheap as they are today.

Either way, we'll never know. What we do know is that if you don't have that info Vanguard isn't going to help you figure it out.

 

[LOL!]

Computers make that bookkeeping easy today (provided you have good, non-Quicken, financial software ) but it used to be a huge P.I.A. So much so that Vangaurd didn't even do it for individual investors until they were told they had to beginning in 2012 (I think).

Here is how we did it before personal computers were invented:
We kept the annual statements that our mutual fund company mailed to us every year. Those annual statements had every transaction on them.

Whenever we sold shares, we drew a line through the "buy" transaction for those shares with a pencil and wrote the date sold next to it. Since there was no internet, we had to mail a "Letter of Instruction" to the mutual fund company: "Please sell the 31.841 shares of VFINX purchased on 09/24/1981 from our account number 0005-1203120392 as soon as possible after receiving this letter and mail us a check."

I think one can still do it that way if they want to. I don't think they have stopped selling pencils.

My non-Vanguard brokers always kept good track of cost basis when I didn't use Average Basis. This is probably because a broker like Fidelity or TDAmeritrade were built on a brokerage platform and for stocks and ETFs one cannot use Average Basis anyways. In contrast, Vanguard didn't have a brokerage platform (and some would argue they still don't), so they almost forced investors to use Average Basis.

 

[pb4uski]

....How did folks using Specific I.D. manage their cost basis when Vanguard promoted a fund you own from Individual Investor Shares to Admiral? They're different funds with different tickers and different NAVs. ...

On the date you converted from Investor shares to Admiral shares just convert each lot using the same conversion ratio used on the conversion date. For that lot, the total cost is the same, the number of shares is adjusted using the conversion ratio. If you sell part of that lot, it would be based on the average cost per share (total costs/post conversion shares).

NAV doesn't matter... just the conversion ratio.

So for example, let's say you initially bought 1,000 Investor shares and paid $35,000. Sometime later, your 1,000 Investor shares convert to 980 Admiral shares. You converted lot is 980 shares with a $35,000 basis. If you sell 100 shares, your cost basis is $3,571 ($35,000/980*100).