Vanguard Cost Basis

[explanade]

There was some discussion about a year or two ago on the question of which cost method to use.

Some people were using specific ID, to maximize their cap gains savings. I don't recall if anyone was using FIFO.

I let it choose the default, which is average cost, because I have DRIP going.

Did I just raise the cost basis given the gains of the last couple of years?


Also, they don't seem to track cost basis for IRA:

"Vanguard's cost basis service offers average cost information only for IRAs established after July 11, 2011."

Kind of a drag to figure out now, because I had moved my IRA accounts from Fidelity and had also done one or two ROTH conversions, looking to do another now before the end of this calendar year.

[Rustward]

I generally use FIFO. When specific lot identification is used, it may be for any of several reasons. It just depends on the investor and the situation.

Basis is usually what an asset cost you to acquire. However, in the context of a traditional IRA, basis is value of the IRA that was contributed after-tax. This would happen if you made after-tax contributions to a traditional IRA. I don't know how a brokerage could track this because they have no way to know if your contribution is pre-tax or post-tax.

Have you made post-tax contributions to a traditional IRA? We did, and track the basis religiously. Form 8606.

Edit: Corrected a misstatement.

[explanade]

All my IRA and Roth IRA contributions are after-tax, or non deductible.

Not too difficult to figure out the actual cost.

But my question is more about my taxable non-retirement assets, which are much bigger and is actively being reinvested, though I haven't made purchases with new funds in awhile.

[samclem]

Quote:

Originally Posted by explanade I let it choose the default, which is average cost, because I have DRIP going. Did I just raise the cost basis given the gains of the last couple of years?

Yes, you've raised the average cost basis if you've been buying shares at a higher price than the existing average price of the shares in you account.

The specific shares method is now a piece of cake, every lot purchased is tracked by VGD, you can just pick from a pulldown menu of the available shares and what you paid for them when it is time to sell.

Sorry, I don't know about the after-tax IRA stuff.

[explanade]

Although if I thick about it, the average cost hasn't been raised too much because the bulk of my shares were purchased at some value and the DRIP purchases, while at a higher cost, have involved a fraction of the shares each time.

Actually if you use FIFO or specific ID and you choose the lowest-cost lot to sell, wouldn't you have higher gains to pay taxes on?

So wouldn't it be more advantageous to use a higher cost basis as the average creeps up slowly due to DRIP at a higher price?

Of course, share prices could also decline too.

[samclem]

Quote:

Originally Posted by explanade Actually if you use FIFO or specific ID and you choose the lowest-cost lot to sell, wouldn't you have higher gains to pay taxes on? So wouldn't it be more advantageous to use a higher cost basis as the average creeps up slowly due to DRIP at a higher price?

The point is, if you use Specific Shares you are in control. If you need to sell a lot of shares this year (e.g. for living expenses or for rebalancing), and if you have only a little room for cap gains before hitting the top of your current bracket, then you would choose to sell shares with less appreciation. OTOH, if you have a lot of room in the 15% income tax bracket (where cap gains rates are zero), and you expect to be in a higher bracket later, then you might choose to sell shares that are more heavily appreciated right now (even if you didn't need the money--just sell and repurchase again later at a higher price) so that later when you need to sell shares for living expenses you'd pay a lower tax than if you still had those cheaply-bought shares .
This flexibility can be especially important for those trying to qualify for an ACA subsidy: The ability to preferentially sell specific shares with a high basis rather than having to use the average basis or FIFO could result in gaining thousands of dollars in subsidies.

[explanade]

OK that makes sense.

[kramer]

Never ever sell using average cost basis. Once you have used this method, you must use it on that batch of security or fund forever. You cannot change methods. This is one of the biggest mistakes long term taxable investors can make. No other method has this problem of irreversibility . .

[kaneohe]

Quote:

Originally Posted by kramer Never ever sell using average cost basis. Once you have used this method, you must use it on that batch of security or fund forever. You cannot change methods. This is one of the biggest mistakes long term taxable investors can make. No other method has this problem of irreversibility . .

While once true (at least you couldn't change w/o IRS permission), this is not true for covered shares. You can change prospectively.....i.e. the shares you purchase after making the basis change, can have a different cost basis type than before.

[RunningBum]

Quote:

Originally Posted by kaneohe While once true (at least you couldn't change w/o IRS permission), this is not true for covered shares. You can change prospectively.....i.e. the shares you purchase after making the basis change, can have a different cost basis type than before.

That doesn't change or correct anything in kramer's statement:

Quote:

Once you have used this method [average cost], you must use it on that batch of security or fund forever. You cannot change methods.

If you sell 100 shares out of 100,000 using average cost, you're stuck with average cost for the other 99,900 shares. You can change the basis type for future purchases, but not for that batch you've already started average cost on.

[explanade]

So I haven't selected a method and as long as I haven't ever sold, I can still select?

Actually, what about transfers, such as moving into Admiral shares? Does that involve a sale?

Also, the concern is about being stuck with one method, not that the average cost method itself is always suboptimal for taxes minimization?

[RunningBum]

From what I've seen, as long as you haven't sold anything you are free to switch basis types.

Conversion to admiral shares is not a taxable event and should not affect the ability to switch cost basis types.

IMO, average cost eliminates your options whether to take larger or smaller gains or even losses. Even if you don't have concerns about keeping income at a certain level for ACA subsidies, Roth conversions, or taking 0% capital gains, you'd want to avoid getting hit with some short term gains that you may get from average cost. Of course if you buy once, don't reinvest, and don't plan to buy more shares, it really doesn't matter, but then again it's no more work to specify shares when you have no choice.

We've always had the choice to identify specific shares, but in the past it was a lot more work, and probably not too many went to the trouble. I know I just took the average cost reports provided by my mutual company. If it was a big deal, more people would've gone to the trouble to track it on their own. But now that mutual fund companies will track it for you, it seems better to identify the shares, just in case you need that flexibility later. Heck, you can even approximate average cost by selling some shares from each of your purchase lots, if you aren't sure whether you want more or less cap gains from a sale.