Mutual fund cost basis for 2012

[Stanley]

WOW! I just started working on my 2012 taxes. I made a number of transactions in 2012 all designed to reduce future taxes. Many of these involved selling in taxable accounts. Often the shares sold were accumulated over many years of investments and reinvestment of dividends.

In the past Vanguard provided me with a cost basis for the shares I sold. This year, I find that I have non-covered securities and must provide the basis myself. Since I have reinvested dividends for many years as well as dollar cost averaged every month for many years, I have scores of transactions to include in the basis.

Any suggestions for a way to handle this before I start plugging though pages of old transaction statements?

Thanks.

 

[anethum]

You can use the average cost basis, which is much easier to calculate than FIFO.

 

[Stanley]

You can use the average cost basis, which is much easier to calculate than FIFO.

Why would that be easier?

 

[anethum]

It's easier because you don't need to look up each purchase price and share amount. You simply add up the number of shares you own as well as the total dollar value of the shares. You divide the dollar value by the number of shares. This figure is the average cost basis. If you multiply this figure by the number of shares you sold and compare it to the actual sale amount, you'll have the gain or loss for your transaction. Be aware, however, that this might not be the most advantageous method tax-wise for you to use, but it will be easy to compute.

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[Tyro]

Why would that be easier?

IIRC, for all those past years you don't have a choice anyway -- you must use average cost basis. See Cost basis - Wikipedia, the free encyclopedia

Tyro

 

[GrayHare]

It's easier because you don't need to look up each purchase price and share amount. You simply add up the number of shares you own as well as the total dollar value of the shares. You divide the dollar value by the number of shares. This figure is the average cost basis.

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I don't see how that's easier since it still requires each purchase to be looked up. After decades of mutual fund reinvestment, there can be dozens of separate purchases to be found on dusty, old paper statements.

You make it sound like people can simply divide the current total value of a holding by current total shares. That's merely the current per share price, not the cost basis.

 

[Stanley]

I don't see how that's easier since it still requires each purchase to be looked up. After decades of mutual fund reinvestment, there can be dozens of separate purchases to be found on dusty, old paper statements.

You make it sound like people can simply divide the current total value of a holding by current total shares. That's merely the current per share price, not the cost basis.

In my case it could be hundreds of transactions for some funds!

That's my fear. I can do it, but it will take hours and maybe days.

Turbo Tax Premier says it will 'help' find the purchase price for each share, but I imagine I must still type in each purchase on my own.

Surely I am not the only person facing this. How did others handle it? Or maybe I just have to do the grunge work and get it over with.

 

[GrayHare]

That's my fear. I can do it, but it will take hours and maybe days.

Bad: yup, it's a PITA. Good: the IRS also has no idea what price you paid. Bad: if audited, the IRS will assume you paid $0 unless you can show otherwise.

A tip: sometimes the December statement will list all purchases during the year, which is handy if your fund had monthly reinvestments.

 

[scrabbler1]

I have been using FIFO for 23 years. With the help of a spreadsheet I created for each mutual fund, it takes maybe 5 minutes to figure out the cost basis and cap gain or loss whenever I make a redemption of shares. I often run what-if scenarios to see what my cap gain or loss is before I actually make the sale.

 

[FIREd]

WOW! I just started working on my 2012 taxes. I made a number of transactions in 2012 all designed to reduce future taxes. Many of these involved selling in taxable accounts. Often the shares sold were accumulated over many years of investments and reinvestment of dividends.

In the past Vanguard provided me with a cost basis for the shares I sold. This year, I find that I have non-covered securities and must provide the basis myself. Since I have reinvested dividends for many years as well as dollar cost averaged every month for many years, I have scores of transactions to include in the basis.

Any suggestions for a way to handle this before I start plugging though pages of old transaction statements?

Thanks.

That's strange. Vanguard provided me with a cost basis for my non-covered securities, but did not report it to the IRS. I just downloaded the 1099-B into Turbotax.

 

[MichaelB]

Vanguard didn't provide it but that does not mean they don't have it. Call them and ask. When I look at a Vanguard account with long term holdings the cost info is right there. If they sent you a year end 2011 statement with the investment position and the amount of unrealized gain, you have it there as well.

 

[meierlde]

Actually first logon and check the cost basis entry under the various shares as well as under the tax item. Often because you put it in or it happened under a trade with vanguard before 2012 they know but the rules don't require reporting so they don't report it.

 

[GrayHare]

I've tried calling, but in general they just chuckle if I ask for details of anything *from previous millenia*. It's the curse of buy and hold (and reinvest).

 

[samclem]

In the past Vanguard provided me with a cost basis for the shares I sold.

What cost basis method were you using for those uncovered shares? Unless you specified something different, the figures Vanguard gave you used the "Average Cost Basis" method, and that's what you must continue to use--for those uncovered shares.
Going forward, you can use the "specifically Identified shares" method for your "covered" shares when you sell them, if you want to. That's what I'm doing. It's very easy, but you have to make that election before you sell and then use it from that point forward. Vanguard does all the tracking for you, no need for spreadsheets of your own anymore (if you trust Vanguard's bookkeeping).

We've had some good threads on this lately. The new rules actually make things easier and they allow you a "reset" if you've been using average cost basis in the past--you can (must) continue to use that for your "uncovered" shares, but now can use the specific shares method to fine-tune your tax planning and let Vanguard handle all the details for your "covered" shares. When you want to sell, Vanguard displays all the lots of covered shares you own and you just sell all/part of any you choose. Simple! It makes it very easy to tax-loss harvest, minimize taxable gains, donate to charity the specific shares that have appreciated the most, etc.

Beware of Application of Average Cost Basis
Poll: Do You Manually Track Your Cost Basis?

Disclaimer: Do your own research, I'm not an expert in this.

 

[samclem]

You simply add up the number of shares you own as well as the total dollar value of the shares. You divide the dollar value by the number of shares. This figure is the average cost basis.

Nope. The average cost basis is the average cost you >paid< not their average value right now. To know what you paid you have to go back and add up all those purchases.
The brokers (Vanguard, etc) usually provide the average cost basis of shares, but if a client has used some other method (e.g. First in, First Out, Specific Shares, etc) in the past then the average cost provided by the broker will be incorrect. And it would be against the regs to use average cost basis anyway (except for the "reset" available when you transition from "uncovered shares" to "covered shares").

 

[Stanley]

OK, I think I can breath easier. Under the My Accounts tab is a place to select Cost Basis. In my case it is average cost. Since what would be my most complicated sale was the entire holding, that will work just fine. I can print out the cost basis report and it has what I need.

Thanks to all who suggested ways to solve this problem. I bow to the superior intellects.

P.S. After reviewing the cost basis report, I see that I managed to capture some nice profits from the run-up. And my portfolio should be more tax efficient for many years to come. Thanks again for your help.

 

[Rustward]

IIRC, for all those past years you don't have a choice anyway -- you must use average cost basis. See Cost basis - Wikipedia, the free encyclopedia

Tyro

Don't quite understand what you are saying. I have always used FIFO, but I have meticulously kept all basis in Quicken and also have every transaction confirmation as well as statements that document reinvestment of dividends and distributed gains going back to 1984.

 

[samclem]

OK, I think I can breath easier. Under the My Accounts tab is a place to select Cost Basis. In my case it is average cost. Since what would be my most complicated sale was the entire holding, that will work just fine. I can print out the cost basis report and it has what I need.

Thanks to all who suggested ways to solve this problem. I bow to the superior intellects.

P.S. After reviewing the cost basis report, I see that I managed to capture some nice profits from the run-up. And my portfolio should be more tax efficient for many years to come. Thanks again for your help.

Good job. Now, give some consideration to changing your cost basis calculation method for your other holdings to "Specific ID" while the subject is on your mind. You'll gain access to a way to save money on taxes every year and Vanguard does all the onerous paperwork.

 

[Animorph]

Don't quite understand what you are saying. I have always used FIFO, but I have meticulously kept all basis in Quicken and also have every transaction confirmation as well as statements that document reinvestment of dividends and distributed gains going back to 1984.

Me too. Spreadsheets and Quicken to track the basis.

Just had to stick with whichever was first used.

 

[Tyro]

Don't quite understand what you are saying. I have always used FIFO, but I have meticulously kept all basis in Quicken and also have every transaction confirmation as well as statements that document reinvestment of dividends and distributed gains going back to 1984.

I kept meticulous records too, but when I went to redeem shares last year & early this year, 3 different companies told me I had to use average cost for shares purchased before 1/12. If they all told me wrong, I don't know what, if anything, I can do about it now.

 

[LOL!]

I kept meticulous records too, but when I went to redeem shares last year & early this year, 3 different companies told me I had to use average cost for shares purchased before 1/12. If they all told me wrong, I don't know what, if anything, I can do about it now.

They told you wrong.

What to do about it: Ignore them and report the basis you can document. As long as you have never used average basis for that mutual fund in that account on your Schedule D to tell the IRS that you are using average basis, you are good to go. This has been detailed for years and years in the Schedule D instructions and probably continues in the newish 8949 instructions as well.

Also read publication 550. A nice discussion starts on page 46.