Originally Posted by RunningBum
VG makes it pretty simple because (I think) they just use FIFO and they will calculate the ST and LT basis and gain/loss of the shares you sold.
Vanguard uses the Average Cost Basis method. By the way, if you are a Vanguard Brokerage Services customer, you can specify that Vanguard instead use either the FIFI or "Highest In, First Out (HIFO) method for computing cost basis on ETFs and stock
shares (they don't do it for any mutual fund share sales).
Yes, you can save on taxes by identifying specific MF shares for sale and notifying Vanguard to sell those, and get confirmation from them, and keep that confirmation (effectively forever--or until you close out that account). Then you'll need to keep track of which ones have been sold don't forget to include the tiny purchases that may have resulted from re-invested dividends). It is an effective way to harvest losses for tax purposes, and to take capital gains at a time when it will do the least tax damage. Overall, it was not worth the hassle to us (well, ME really), we just use the average cost basis provided by Vanguard.
It probably makes sense to look at two things right now in consideration of your particular circumstances:
1) Would it make sense to sell all/some non-tax-deferred holdings before 2010 in order to get the more favorable current Cap gains tax rate, and re-purchase the same assets shortly thereafter? In addition to re-setting your cost basis at a higher level, it would also give a chance to tweak your asset allocation without (additional) tax consequences. Also, if one wanted to start using a different method of cost basis calculation, it could be done from a clean sheet.
2) Maybe work out the $$/hour of the time investment to do any type of "specific shares" cost basis accounting.