Specific Identification Cost Basis for Mutual Funds

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Specific Identification Cost Basis for Mutual Funds

Postby boglehead123 » Wed Jan 13, 2010 1:03 pm

Which brokerage firms accurately support the specific identification of shares method for cost basis on mutual funds? I know that some brokerage firms support specific ID for stocks and ETFs but only offer average cost for mutual funds. I've read that Fidelity offers specific ID for mutual funds. Does anyone have any experience on this issue with Charles Schwab, TD Ameritrade, E*Trade, Scottrade, etc.?
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Postby livesoft » Wed Jan 13, 2010 6:54 pm

There are two issues and I'm not sure which one you are refering to.

There is specific identification of shares for telling the broker which shares to sell. And there is the cost basis of your shares.

TDAmeritrade uses GainsKeeper for you to keep the cost basis, but does not use this to specifically identify shares for selling. I don't think TDAmeritrade reports average cost basis ever.

WellsFargo has a nice easy way to specifically identify shares for selling. I don't think it reports average cost basis ever.

So on the cost basis thing, if you don't specifically identify your shares, it's first-in, first-out or FIFO. WF will tell you the cost basis of the shares you sell. It will be the amount of money you used to purchase those exact shares and not an average cost basis.
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Postby boglehead123 » Wed Jan 13, 2010 7:09 pm

I'm wondering which brokerage firms are able to do the following with respect to mutual fund sales: (1) when selling mutual fund shares online, will bring up a list of open tax lots and allow the accountholder to choose how many shares are being sold from each tax lot, (2) show the specific tax lots chosen by the accountholder on the trade confirmation (to satisfy the IRS rule that the broker must confirm the tax lots in writing), and (3) after the sale, subtracts the tax lots sold in the transaction and keeps an accurate list of tax lots that are still open. I know some brokers offer this feature for stock/ETFs but not mutual funds.

I've had a hard time finding this information online, and the brokerage firm comparisons/reviews in magazines or other publications don't seem to compare this important feature even though I think some firms do a good job in this area and others don't.
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Postby livesoft » Wed Jan 13, 2010 7:14 pm

WF does this. Also at tax time, TurboTax downloads the WF 1099B and fills out Schedule D transactions automatically for you accurately and completely.

There are many other advantages to using WellsFargo if you can have $25K combined in all your WF accounts. Search the forum for more accolades about WF.
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Postby boglehead123 » Thu Jan 14, 2010 2:48 am

Does anyone know whether Charles Schwab offers specific identification of shares for mutual funds?

They announced $8.95 equity trades for all customers on their website, which seems pretty enticing to me.
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Postby livesoft » Thu Jan 14, 2010 9:06 am

$8.95 doesn't sound enticing to me since it does not cover mutual fund transactions that are not in the Schwab NTF network.

In contrast, how does $0 sound and it does include include all mutual funds? This is the deal that WellsFargo offers to PMA customers who keep at least $25K combined in their brokerage, checking & other accounts
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Postby Drain » Thu Jan 14, 2010 2:55 pm

boglehead123 wrote:Does anyone know whether Charles Schwab offers specific identification of shares for mutual funds?

They can't seem to make up their mind on this. For a long time, they made specifying lots difficult enough so that I didn't bother. Well, I did specify lots, but only in my own records. Then a couple of years or so ago, I discovered by accident that I could call Schwab after placing a trade and have the "vs. purchase" information show up on my email confirmations. That's what I've been doing until the last trade I placed, when I was informed that, while they would make an exception in that particular case, the policy was that getting that vs.-purchase info onto my confirmations required phone contact and would be charged at the live-broker rate. That's the most recent experience I've had, and it was in the last several months.

I don't know why they don't simply put a Customer Remarks section on their order-entry page. Those remarks could then be placed on confirmations at no cost (excluding original implementation) to the brokerage. On a confirmation, the remarks could be accompanied by whatever legal disclaimers Schwab felt were necessary.
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Postby pshonore » Thu Jan 14, 2010 3:51 pm

Just putting it in the "remarks" section won't help them in a few years when they have to report basis to the IRS upon sale. They're going to need a way to programmatically identify which shares you sold if other than the default (FIFO)
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Postby Drain » Thu Jan 14, 2010 5:38 pm

pshonore wrote:Just putting it in the "remarks" section won't help them in a few years when they have to report basis to the IRS upon sale. They're going to need a way to programmatically identify which shares you sold if other than the default (FIFO)

The remarks would be fine for that, as they'd specify lots and they'd demonstrate that the specification occurred at the time of the trade. That's all the IRS wants, as far as I know. Plus, I'd think that Schwab maintains records of its trade confirmations, so it would indeed have the info itself if the IRS cared.

If it mattered to the IRS at all that Schwab was maintaining some sort of database with cost bases, then virtually all Schwab mutual-fund investors who choose anything other than FIFO would be in violation, as, in my experience, Schwab isn't even entirely accurate with average cost.
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Postby pshonore » Thu Jan 14, 2010 5:56 pm

Drain wrote:
pshonore wrote:Just putting it in the "remarks" section won't help them in a few years when they have to report basis to the IRS upon sale. They're going to need a way to programmatically identify which shares you sold if other than the default (FIFO)

The remarks would be fine for that, as they'd specify lots and they'd demonstrate that the specification occurred at the time of the trade. That's all the IRS wants, as far as I know. Plus, I'd think that Schwab maintains records of its trade confirmations, so it would indeed have the info itself if the IRS cared.

If it mattered to the IRS at all that Schwab was maintaining some sort of database with cost bases, then virtually all Schwab mutual-fund investors who choose anything other than FIFO would be in violation, as, in my experience, Schwab isn't even entirely accurate with average cost.
Schwab ( and all other brokers) are going to need a way to report basis in a few years on Form 1099B. The remarks are fine for the documentation the IRS requires on specific identification if its questioned, but will not help Schwab determine your basis when reporting on a 1099B down the road. Think about it - how would a programmer take a free form remarks section and figure out which shares you sold to calculate your basis and produce the tax form? Schwab is probably planning for the new requirements.
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Postby mas » Thu Jan 14, 2010 6:29 pm

pshonore wrote:The remarks are fine for the documentation the IRS requires on specific identification if its questioned, but will not help Schwab determine your basis when reporting on a 1099B down the road.

It will be interesting to see how the new rule is implemented by brokers. There will need to be an alternate way to inform the broker of the cost basis when that new reporting requirement comes into effect. Neither Schwab, nor other brokers could possible know what you paid for an asset 50 years ago that has transferred among several different brokers since its purchase. Or consider a wash sale that has occured across two different brokers many years ago.

For new purchases/sales they will need to keep complete records (and as you say a remarks field won't cut it), and asset transfers will need to also transfer the basis info.
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Postby Drain » Thu Jan 14, 2010 6:43 pm

pshonore wrote:Schwab ( and all other brokers) are going to need a way to report basis in a few years on Form 1099B. The remarks are fine for the documentation the IRS requires on specific identification if its questioned, but will not help Schwab determine your basis when reporting on a 1099B down the road. Think about it - how would a programmer take a free form remarks section and figure out which shares you sold to calculate your basis and produce the tax form? Schwab is probably planning for the new requirements.

I guess that if the form is a legal requirement, then the information on it will probably be reliable. Otherwise, I've learned not to trust Schwab or anyone else with my cost basis records. Seems like every time a brokerage upgrades its software, data entered previously is lost. Then again, maybe I am really just remembering experiences with Schwab and not other institutions.
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Postby dbr » Thu Jan 14, 2010 8:16 pm

mas wrote:
pshonore wrote:The remarks are fine for the documentation the IRS requires on specific identification if its questioned, but will not help Schwab determine your basis when reporting on a 1099B down the road.

It will be interesting to see how the new rule is implemented by brokers. There will need to be an alternate way to inform the broker of the cost basis when that new reporting requirement comes into effect. Neither Schwab, nor other brokers could possible know what you paid for an asset 50 years ago that has transferred among several different brokers since its purchase. Or consider a wash sale that has occured across two different brokers many years ago.

For new purchases/sales they will need to keep complete records (and as you say a remarks field won't cut it), and asset transfers will need to also transfer the basis info.


My understanding is that basis accounting will not apply to assets already in account for exactly the reasons you state.
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Postby boglehead123 » Tue Jan 19, 2010 12:40 pm

Regarding Schwab, if you need to ask them to put the tax lot information on the confirmation (instead of the process being automated on the website, like Fidelity or Wells Fargo), does that mean the cost basis information on the Schwab statement after the trade will be inaccurate since they only use average cost? Or, when you ask them to sell specific lots, do they take the extra step of updating the cost basis in their system so that the cost basis on their statements accurately reflects the specific lots sold?

Seems like many brokerage firm will need to do major IT overhauls to get ready for the Emergency Economic Stabilization Act (the law that requires brokers to report cost basis to the IRS within a couple years).
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