VG requesting to set cost basis method

[teejayevans]

Vanguard is asking me to set my preferred desired cost basis method. I leaning towards either Average (because VG automatically calculates this method) or FIFO (because that should prevent taxing short term gains). Is there any pro/con for either method?
I check VG site, they mention "FIFO gains/losses are market dependent", hmmm, isn't that true for all methods? They also don't list "hands-off" as a pro for the average method, what "hands-on" do I need to do for that method?
TJ

 

[nun]

Average is simple and works with the least effort.

 

[RunningBum]

Once this takes effect, won't Vanguard report the cost basis of any sale based on the method you use? I am a bit more concerned about the transition though. I've been using Average since that's what VG reports to me now, so switching methods seems complicated, very complicated if VG doesn't do it for me. I was leaning towards SpecID since that would give me the most control, but if I've accumulated shares in a mutual fund over time and have sold 20% of them, and in the future balance back in and out and withdraw over time, it would be very difficult for me to figure out the cost.

Here's a question: If I bought some shares last year and some shares this year, and sell this year using average cost, is it all considered LT cap gains, or will some of it be ST, since the average cost included recent shares?

 

[Onward]

I'm facing the same decision at VG. Do you set it once for all your funds, or do you set it individually for each fund?

 

[Animorph]

I use selected shares (specific lots...) for everthing. It's not hard, and you can select your favorite hands-off method as a backup if you don't feel like actually selecting shares. Sometimes I want a small gain, perhaps to avoid a wash sale, sometimes a large loss is good for tax loss harvesting, someday a large gain might be good if my taxes are low that year.

 

[kaneohe]

I'm facing the same decision at VG. Do you set it once for all your funds, or do you set it individually for each fund?

Not sure what VG allows but other funds seem to allow you to do whatever you want.....one blanket decision for all or specific methods for specific funds. Not sure why you would do the latter tho.

I like the specific shares option so you get whatever result is more favorable for you (w/ a bit more work). With this option, they want you to select a backup method in case you fail to elect specific shares.
I kind of like the loss/gain utilization that minimizes taxes but can be overridden by selecting particular shares.

 

[FIREd]

I'm facing the same decision at VG. Do you set it once for all your funds, or do you set it individually for each fund?

VG will ask you to set it individually for each fund. I just set my cost basis method at VG and decided to use the average cost method for all my mutual funds because that's what I have been using for years. I am not sure yet what method I will use for my individual stocks.

 

[Texas Proud]

Here's a question: If I bought some shares last year and some shares this year, and sell this year using average cost, is it all considered LT cap gains, or will some of it be ST, since the average cost included recent shares?

If you have average and sell, then under your example you would have both long and short gain...

 

[MichaelB]

If you have average and sell, then under your example you would have both long and short gain...

+1.

 

[Rustward]

My understanding is that if you still own shares of a fund of which you have already sold other shares, you are stuck with the method you used for the shares already sold. Once you sell any shares or a particular fund, you must use the same method when you sell the remaining shares of that fund. This is on a per fund basis. It may also be on a per account basis, but I am not sure about that.

So if you still own shares of a fund that you have sold some shares of already, the decision has already been made.

 

[MichaelB]

My understanding is that if you still own shares of a fund of which you have already sold other shares, you are stuck with the method you used for the shares already sold. Once you sell any shares or a particular fund, you must use the same method when you sell the remaining shares of that fund. This is on a per fund basis. It may also be on a per account basis, but I am not sure about that.

So if you still own shares of a fund that you have sold some shares of already, the decision has already been made.

Correct

 

[easysurfer]

I went with AVERAGE, AVERAGE, AVERAGE as in LOCATION, LOCATION, LOCATION in buying a house. For me, keeping it simple protects me from making more work for myself than needed.

The simplicity of just using average outweighs the effort involved of the other methods.

 

[RunningBum]

In the FAQ, VG says it will keep different average prices for the covered (by the new legislation) shares vs the uncovered (existing) shares. They will also sell from the uncovered first.

If I use the average cost method for my covered and noncovered shares, how will Vanguard determine which shares are being sold?

If you use the average cost method for covered and noncovered shares, Vanguard will sell your oldest (noncovered) shares first. Once all noncovered shares are sold, Vanguard will sell the covered shares. You'll also have two average cost figures—one for your noncovered shares and one for your covered shares.

They don't specifically say so, but this implies you can switch to another method even if you've sold some already, but only for the newly bought shares. It seems that they would apply average cost for the old shares, and then SpecID (if I choose that method) for the newly purchased shares, and they'd sell the old shares first.

I think I'm going to check with my personal rep.

 

[RunningBum]

VG is having an online discussion panel on the cost basis topic Thurs at 7pm eastern. Sign up for it online.

 

[MichaelB]

They don't specifically say so, but this implies you can switch to another method even if you've sold some already, but only for the newly bought shares. It seems that they would apply average cost for the old shares, and then SpecID (if I choose that method) for the newly purchased shares, and they'd sell the old shares first.

I think I'm going to check with my personal rep.

For a mutual fund you have three choices: specific share identification, single category average, or double category average. You can use specific share id and in the future either of the two averages but you cannot go from one average calculation to the other. Once you use an average you cannot go back to specific id.

One average calculates a single average cost, the other calculates the short term average cost and the long term average cost separately.

 

[kaneohe]

My understanding is that if you still own shares of a fund of which you have already sold other shares, you are stuck with the method you used for the shares already sold. Once you sell any shares or a particular fund, you must use the same method when you sell the remaining shares of that fund. This is on a per fund basis. It may also be on a per account basis, but I am not sure about that.

So if you still own shares of a fund that you have sold some shares of already, the decision has already been made.

My understanding of the current (soon ....in 2012.....to be known as the
OLD method) is that this is true if you have used AVG basis in the past.
You are stuck with that for now. Not true tho if you have used some other method. You could switch methods even to AVG but not the other way around.

My understanding of the new method starting in 2012 for new shares purchased (covered shares) is that you can switch methods for future shares that you buy but that you cannot change the basis of shares already bought under another method.

 

[kaneohe]

For a mutual fund you have three choices: specific share identification, single category average, or double category average. You can use specific share id and in the future either of the two averages but you cannot go from one average calculation to the other. Once you use an average you cannot go back to specific id.

One average calculates a single average cost, the other calculates the short term average cost and the long term average cost separately.

My understanding that starting in 2012,there will only be one average cost
and the double category will vanish for new covered shares purchased in 2012 and later. Not sure what happens for older shares purchased before 2012.

 

[MichaelB]

My understanding that starting in 2012,there will only be one average cost
and the double category will vanish for new covered shares purchased in 2012 and later. Not sure what happens for older shares purchased before 2012.

You're correct. I just read that the double avg cost was eliminated earlier this year. Good - it was limited in scope, so not a big loss.

 

[RunningBum]

From the VG online talk tonight, you can switch out of average cost. You basically have 2 buckets: the uncovered (bought before 2012) shares, and if you used average cost, you keep it for those shares; and covered (bought after 2012), where you can choose a new method.

In fact, according to this schwab white paper I found at http://content.schwab.com/web/as/public/costbasis/pdf/2012_Cost_Basis_White_Paper.pdf
you can switch out of average cost at any time, and the new method will apply to shares bought after the switch.

Average cost method. Another significant development coming with the second phase of the legislation is that your clients who currently use average cost for their mutual funds will be able to move out of average cost to another method by making their request in writing. IRS approval is no longer required in order to change from the average cost method. The starting basis will be averaged at the time of the change, and the average cost method will apply to shares owned at that time. But shares purchased after the change will use the new cost basis method you or your clients have chosen. It will be important for you to consider which cost basis method to use when you purchase new shares of the fund.

 

[RunningBum]

sorry, double post due to internet issues

 

[bamsphd]

Not sure what VG allows but other funds seem to allow you to do whatever you want.....one blanket decision for all or specific methods for specific funds. Not sure why you would do the latter tho.

I have used specific identification for my equity funds, but let Vanguard track average cost for my short-term bond fund.

The equity funds have very few if any transactions per year, so the book keeping is manageable. However, the short-term bond fund has lots of pesky little transactions, so it has been much easier to let Vanguard track the average cost. If Vanguard had fully supported specific identification from day one, it might not have been much of an issue, but tracking specific identification manually is not much fun when lots of little transactions are involved.

 

[explanade]

The little transactions are what, capital gains distributions and dividend reinvestments?

 

[bamsphd]

The little transactions are what, capital gains distributions and dividend reinvestments?

Mostly reinvested monthly dividends. Short-term bond has monthly dividends reinvested, plus my own transactions, and some years also has a capital gain distribution reinvested.

 

[kaneohe]

I have used specific identification for my equity funds, but let Vanguard track average cost for my short-term bond fund.

The equity funds have very few if any transactions per year, so the book keeping is manageable. However, the short-term bond fund has lots of pesky little transactions, so it has been much easier to let Vanguard track the average cost. If Vanguard had fully supported specific identification from day one, it might not have been much of an issue, but tracking specific identification manually is not much fun when lots of little transactions are involved.

Makes perfect sense to me. ........and pesky is the right word. I never ever
even contemplated reinvesting monthly dividends in bond funds for that reason.