Cost basis: SpecID (Specific ID) vs average cost

[someguy]

Has anyone run an analysis of $ using specID vs average cost? What I'm really interested in is some kind of idea of the total net difference. Obviously, specID is a superior method to average cost, but what is a realistic range and average in terms of difference? Has anyone done a look-back calculation of their own finances? Or done or aware of a monte carlo type simulation?

 

[Sunset]

I think the biggest advantage of specific ID is to control the capital gains at the time. Pretty important in a taxable account depending upon a person's specific circumstances.

 

[RunningBum]

I don't feel like you can generalize it like you want. It depends how often you buy, how long you're going to hold, how volatile the fund is, and so on.

A big deal for me was during the downturn in early 2020, I could harvest some significant losses using spec ID, but my average would still have been a gain. It's very helpful to use spec ID when trying to control income for ACA subsidy, IRMAA, or just leaving more room for Roth conversions.

Considering that the holding company will track it for you, I don't know why you would even consider average cost. It takes an extra few seconds when selling shares to select which ones you want to sell, but I wouldn't call it any more complicated.

 

[braumeister]

Considering that the holding company will track it for you, I don't know why you would even consider average cost. It takes an extra few seconds when selling shares to select which ones you want to sell, but I wouldn't call it any more complicated.

Schwab has a nice feature on their site that lets you just tell them to sell shares in the most tax efficient manner. They have done a good job of it in my experience. Fidelity doesn't have that; I don't know about Vanguard.

 

[RunningBum]

Schwab has a nice feature on their site that lets you just tell them to sell shares in the most tax efficient manner. They have done a good job of it in my experience. Fidelity doesn't have that; I don't know about Vanguard.

Vanguard doesn't have that either. They will show you a list of shares available to sell by purchase date, what the cost basis, proceeds, and ST or LT gain or loss would be if you sold all from that purchase dates. And of course you can sell fewer than all shares from that purchase date. Now that I think about it there is a little complexity there as you have to do the math yourself to see the % gain or loss for each group of shares.

 

[audreyh1]

It’s very dependent on the individual purchase history and the share price history.

Fidelity lets you pick specific shares but also fill first by highest cost, lowest cost, long term shares, etc. and then you can modify it.

 

[Animorph]

I didn't want to buy, rebalance, and sell a bunch of shares and end up with a basis cost I couldn't easily calculate. Plus the specific ID method gave me much more flexibility and options when trying to minimize taxes. And back in the old days you used to be stuck with your cost basis choice for as long as you owned the shares. For me, specific ID was easy, average cost was complex and restrictive.

 

[audreyh1]

I was really glad when I converted my brokerage account to specific share cost basis, and only wished I’d done it way earlier because it would have saved me a bunch in capital gains taxes. I didn’t understand the implications well enough starting out.

 

[clobber]

Considering that the holding company will track it for you, I don't know why you would even consider average cost. It takes an extra few seconds when selling shares to select which ones you want to sell, but I wouldn't call it any more complicated.

That's only true for covered (recent shares). If you have DCA for 30 years then SpecID can be a hassle.

 

[karluk]

Has anyone run an analysis of $ using specID vs average cost? What I'm really interested in is some kind of idea of the total net difference. Obviously, specID is a superior method to average cost, but what is a realistic range and average in terms of difference? Has anyone done a look-back calculation of their own finances? Or done or aware of a monte carlo type simulation?

That's an interesting question. I was curious enough to look into my own transaction history from last March, when I sold shares of a Vanguard mutual fund on three separate dates to establish a loss for tax purposes. Assuming that I would have sold the same number of shares on the same dates, it made absolutely no difference whatsoever which type of cost basis I used.

What did change was the amount of realized vs. unrealized gains or losses after each transaction. With specID, I had a realized loss on each of the three transactions. With average cost, I had about a $50 realized gain on the first transaction and somewhat larger realized losses on the second and third transaction, adding up to the same total realized loss for both specID and average cost.

Thinking about it, it appears to me that this is a universal phenomenon. SpecID provides more flexibility at the time of sale, but there will always be a trade-off because of the remaining unrealized gain or loss on the shares you still own.

 

[audreyh1]

Thinking about it, it appears to me that this is a universal phenomenon. SpecID provides more flexibility at the time of sale, but there will always be a trade-off because of the remaining unrealized gain or loss on the shares you still own.

The biggest benefit is that if you keep your lowest cost basis shares around (highest unrealized gains), you can make your charitable gifts from those (gift of highly appreciated assets) and/or your heirs will likely receive a stepped up basis if they inherit those shares from you.

So you aren’t necessarily paying the taxes on all those lowest cost basis shares!

 

[karluk]

The biggest benefit is that if you keep your lowest cost basis shares around (highest unrealized gains), you can make your charitable gifts from those (gift of highly appreciated assets) and/or your heirs will likely receive a stepped up basis if they inherit those shares from you.

So you aren’t necessarily paying the taxes on all those lowest cost basis shares!

Those are benefits, but I don't think they're the biggest benefit. I have a very concrete benefit from tax loss harvesting last March that doesn't depend on future events like charitable gifts or stepped up basis for heirs.

I didn't mention it in my earlier post, but I wasn't actually a net seller of equities in March. On the same days that I sold from my taxable account, I purchased similar investments in my tax sheltered accounts. If I had sold from taxable without repurchasing elsewhere, I would have fallen into the "buy high, sell low" school of investing. But by repurchasing in my retirement accounts, I maintained exactly the same equity exposure as if I hadn't sold anything. Thus, when we experienced a quick rebound in the stock market, I ended up with the same profit that I would have had by not selling anything at all.

My profit consists of having those stock gains sheltered from taxes. Opportunistic selling while the market was crashing gave me a capital loss that I can deduct from ordinary income. My after tax profit is significantly higher than if I had simply stood pat and continued to hold my shares in the taxable account.

Naturally, this is all situational, since market crashes don't happen every year. But the potential for favorable tax maneuvers is the main reason I continue to hold some equities in taxable accounts. Otherwise I would just keep everything in my Roth IRA and 401k.

I posted in this thread because I was curious whether I had better options than using specID cost basis. Overall, I don't think it makes much difference. For me personally last March, my guess is that I would have been better off using average cost. The reason? I would never have made the first sale that would have resulted in a $50 gain using average cost. I would have waited for a further decline. Using average cost would have encouraged me to be more patient and not sell until we were farther along in the crash.

 

[Montecfo]

Those are benefits, but I don't think they're the biggest benefit. I have a very concrete benefit from tax loss harvesting last March that doesn't depend on future events like charitable gifts or stepped up basis for heirs.

I didn't mention it in my earlier post, but I wasn't actually a net seller of equities in March. On the same days that I sold from my taxable account, I purchased similar investments in my tax sheltered accounts. If I had sold from taxable without repurchasing elsewhere, I would have fallen into the "buy high, sell low" school of investing. But by repurchasing in my retirement accounts, I maintained exactly the same equity exposure as if I hadn't sold anything. Thus, when we experienced a quick rebound in the stock market, I ended up with the same profit that I would have had by not selling anything at all.

My profit consists of having those stock gains sheltered from taxes. Opportunistic selling while the market was crashing gave me a capital loss that I can deduct from ordinary income. My after tax profit is significantly higher than if I had simply stood pat and continued to hold my shares in the taxable account.

Naturally, this is all situational, since market crashes don't happen every year. But the potential for favorable tax maneuvers is the main reason I continue to hold some equities in taxable accounts. Otherwise I would just keep everything in my Roth IRA and 401k.

I posted in this thread because I was curious whether I had better options than using specID cost basis. Overall, I don't think it makes much difference. For me personally last March, my guess is that I would have been better off using average cost. The reason? I would never have made the first sale that would have resulted in a $50 gain using average cost. I would have waited for a further decline. Using average cost would have encouraged me to be more patient and not sell until we were farther along in the crash.

Not sure why you needed to "purchase them elsewhere". If you mean to avoid wash sale rules, I don't think your strategy is effective.

It sounds like your reason for using specific ID is psychological. For most folks I think we can look at a series of positions in a stock in the aggregate in our financial accounts, and see if we're in a gain in the aggregate or at a loss in the aggregate. We need not use an average cost approach to get that benefit.

But I am a fan of anything that helps people to stay fully invested and avoid trading on emotion.

 

[audreyh1]

I was specifically talking about what can ultimately happen low cost basis shares. In tax loss harvesting you are typically using your highest cost basis shares. Also when rebalancing, etc.