Cost basis question about Vanguard's covered/uncovered mutual fund shares

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bobsmith
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Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

So I've had this Vanguard fund I've held at Vanguard for 20 years. It was never held anywhere else. Long ago I established it to use the average-cost-basis method. Then, after the rules changed (2014?) requiring Vanguard to keep records of the sales, I found myself holding uncovered shares. For a couple years I left it alone. However, because the fund was set to reinvest, more shares of the same fund were purchased. (I've since set the fund to reinvest into a different fund which uses specified share). Even so, when I look at my Vanguard investments online, it shows this fund with holdings separated into "covered" and "uncovered" shares. The "uncovered" shares are made up of about 65% unrealized gain, while the newer "covered" shares reflect a 30% unrealized gain. Out of curiosity, I began an online transaction to see if I could sell just the "covered" shares. Even though the fund clearly shows average cost basis as the method, I was prompted to select a cost basis method. I backed out of the transaction and called vanguard.

The Vanguard rep didn't seem too sure of himself, but he said if I tried to sell or exchange the fund shares, Vanguard would always force me to sell the "uncovered" shares first using the established average-cost-basis method and only then could I sell the "covered" shares. This was unfortunate because not only was I stuck with average-cost-basis method, but I'm forced to sell the oldest shares first (with the higher proportion of unrealized gain). Unsurprisingly, I was told I couldn't elect a different cost basis method (SpecID) for the covered shares and it wasn't really explained to me why the online transaction was prompting me to establish a cost basis method when I'd already done so. I also noticed that even for the "covered" shares, there was no record shown of when I bought and sold the shares and at what amounts as I typically see with funds using the specified share method. (I assume some information can be found looking at transaction history).

Anyway, the fund fits fine into my portfolio and I've already got the gains being reinvested into a different fund so with 65% unrealized gains, I'm okay to just leave it be for the long term. My question to the forum is, is there any other strategy for working with funds like these? Any way to get at those "covered" share gains or to change the cost basis? I never kept any buy/sell records of my own before 2014. I wonder if I ever do sell all the "uncovered" shares using average-cost-basis, will I then be able to chose SpecID for the covered shares? Any other advice on how I might better manage this fund? Thanks.
livesoft
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by livesoft »

I have one single mutual fund in a taxable account at Vanguard. The shares are all uncovered. I set the cost basis method to Specific ID whenever Vanguard.com allowed that to be done through the web interface. Vanguard.com even says the cost basis method is Specific ID. Nevertheless, when I have sold shares in the past, I believe the 1099-B from Vanguard did not provide a cost basis which, of course, did not bother me since I have records to show my cost basis.

So I recommend that you set your Cost Basis Method to Specific Identification today through the web interface. You don't have to sell shares to do that. Then see what your account shows you in a few days after Vanguard.com follows through with your request.
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goingup
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by goingup »

This is what I've done and I can't guarantee it's the best way, but it works for me.
*All shares before 2012 are uncovered. They'll sell at Average Cost, when I sell them
*All shares after 2012 I set to SPEC ID. I can choose which tax lots to sell, when I sell them.

Go into your account, to Cost Basis. Change setting to SPEC ID. In a few days you'll see that each purchase lot has its own cost basis.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by Pigeye Brewster »

livesoft wrote: Thu Nov 16, 2017 1:50 pm So I recommend that you set your Cost Basis Method to Specific Identification today through the web interface.
I made this change a year or two ago on a fund with both covered and uncovered shares. It is quick and easy to do.

I haven't tried selling any, so I don't know how they'd handle that.

I have made a direct charitable donation and a transfer to DAF. In both cases, they used the older uncovered shares, which is what I wanted because they have much lower basis. I then bought additional shares to replace at a much higher basis and using specific ID.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

goingup wrote: Thu Nov 16, 2017 2:28 pm This is what I've done and I can't guarantee it's the best way, but it works for me.
*All shares before 2012 are uncovered. They'll sell at Average Cost, when I sell them
*All shares after 2012 I set to SPEC ID. I can choose which tax lots to sell, when I sell them.

Go into your account, to Cost Basis. Change setting to SPEC ID. In a few days you'll see that each purchase lot has its own cost basis.
Have you sold any yet to confirm this is the case? I was told the uncovered had to be sold first. Are you saying after all those are sold then I'll be able to use specified ID on the newer covered shares? Also, if go select SpecID now, are you saying that the current covered shares will be able to be changed to specified ID or will this only apply to new shares that I purchase after making the new cost basis selection? Sorry, this is a bit confusing.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

livesoft wrote: Thu Nov 16, 2017 1:50 pm I have one single mutual fund in a taxable account at Vanguard. The shares are all uncovered. I set the cost basis method to Specific ID whenever Vanguard.com allowed that to be done through the web interface. Vanguard.com even says the cost basis method is Specific ID. Nevertheless, when I have sold shares in the past, I believe the 1099-B from Vanguard did not provide a cost basis which, of course, did not bother me since I have records to show my cost basis.

So I recommend that you set your Cost Basis Method to Specific Identification today through the web interface. You don't have to sell shares to do that. Then see what your account shows you in a few days after Vanguard.com follows through with your request.
I guess my only concern would be that setting it now to SpecID will create some kind of future unneeded confusion with I IRS when I, in the future, do decide to finally sell some shares. I don't have records to show cost basis before 2012. It's not clear to me if setting SpecID will effect the past covered shares or only apply to newly purchased. This isn't a huge issue, but still would be nice to deal with it as best I can.
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goingup
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by goingup »

bobsmith wrote: Thu Nov 16, 2017 2:53 pm
goingup wrote: Thu Nov 16, 2017 2:28 pm This is what I've done and I can't guarantee it's the best way, but it works for me.
*All shares before 2012 are uncovered. They'll sell at Average Cost, when I sell them
*All shares after 2012 I set to SPEC ID. I can choose which tax lots to sell, when I sell them.

Go into your account, to Cost Basis. Change setting to SPEC ID. In a few days you'll see that each purchase lot has its own cost basis.
Have you sold any yet to confirm this is the case? I was told the uncovered had to be sold first. Are you saying after all those are sold then I'll be able to use specified ID on the newer covered shares? Also, if go select SpecID now, are you saying that the current covered shares will be able to be changed to specified ID or will this only apply to new shares that I purchase after making the new cost basis selection? Sorry, this is a bit confusing.
You do not have to sell uncovered shares first. Or ever.
Only the covered shares will change when you select SPEC ID--those purchased after 2012.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by cas »

bobsmith wrote: Thu Nov 16, 2017 1:43 pm I also noticed that even for the "covered" shares, there was no record shown of when I bought and sold the shares and at what amounts as I typically see with funds using the specified share method. (I assume some information can be found looking at transaction history).

<skip>

I never kept any buy/sell records of my own before 2014.
(emphasis added by me)

Does the inclusion of the "sell" language in your post imply that you have sold shares of this fund in the past? If so, was the average cost basis method used for those sales?

I'm not an expert, but I think if you ever used the average cost basis in the past to sell shares of this fund, you can't now change to a different cost basis method for this fund. (The covered/uncovered shares might throw a bit of a wrinkle into that, since those are kind of separated within a single mutual fund. But the IRS language below doesn't seem to distinguish between covered/uncovered.)

IRS Publication 550, p. 46 ( https://www.irs.gov/pub/irs-pdf/p550.pdf
You can figure your gain or loss using a [FIFO or Specific ID] cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.
(Or maybe your main question is how you can get at just the (apparently lower average cost basis) pile of covered shares, to sell them before selling the uncovered shares. And that is a different question from whether you can change the cost basis accounting method, which may not be your main concern. )
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by FactualFran »

cas wrote: Thu Nov 16, 2017 3:14 pm I'm not an expert, but I think if you ever used the average cost basis in the past to sell shares of this fund, you can't now change to a different cost basis method for this fund. (The covered/uncovered shares might throw a bit of a wrinkle into that, since those are kind of separated within a single mutual fund. But the IRS language below doesn't seem to distinguish between covered/uncovered.)

IRS Publication 550, p. 46 ( https://www.irs.gov/pub/irs-pdf/p550.pdf
You can figure your gain or loss using a [FIFO or Specific ID] cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.
That quote applies to noncovered shares. With covered shares, "A taxpayer may change basis determination methods from the average basis method to another method prospectively at any time." See the Chaging Cost Basis Methods web page at fairmark.com.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

goingup wrote: Thu Nov 16, 2017 3:05 pm You do not have to sell uncovered shares first. Or ever.
Only the covered shares will change when you select SPEC ID--those purchased after 2012.
What you say makes sense, but when I called Vanguard, they said I would have to sell the uncovered shares first, no matter what. Have you actually confirmed this can be done as you say?
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goingup
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by goingup »

bobsmith wrote: Fri Nov 17, 2017 8:35 am
goingup wrote: Thu Nov 16, 2017 3:05 pm You do not have to sell uncovered shares first. Or ever.
Only the covered shares will change when you select SPEC ID--those purchased after 2012.
What you say makes sense, but when I called Vanguard, they said I would have to sell the uncovered shares first, no matter what. Have you actually confirmed this can be done as you say?
Yes. Last year I sold covered shares of VWIUX (Int. Tax Exempt Bond) and left all uncovered shares unsold.

Step back and think about this for a moment. Do you really think a broker is going to tell you which shares you have to sell first? That wouldn't make any sense. It's your money!!

You are misunderstanding something that Vanguard is telling you, but I'm not sure what they are trying to tell you. It doesn't really matter though, does it? Just go into your taxable account and change the cost basis to SPEC ID. If you sell uncovered shares, they'll be recorded at average cost. If you sell covered shares, you'll have the actual SPECIFIC ID.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

cas wrote: Thu Nov 16, 2017 3:14 pm
bobsmith wrote: Thu Nov 16, 2017 1:43 pm I also noticed that even for the "covered" shares, there was no record shown of when I bought and sold the shares and at what amounts as I typically see with funds using the specified share method. (I assume some information can be found looking at transaction history).

<skip>

I never kept any buy/sell records of my own before 2014.
(emphasis added by me)

Does the inclusion of the "sell" language in your post imply that you have sold shares of this fund in the past? If so, was the average cost basis method used for those sales?

I'm not an expert, but I think if you ever used the average cost basis in the past to sell shares of this fund, you can't now change to a different cost basis method for this fund. (The covered/uncovered shares might throw a bit of a wrinkle into that, since those are kind of separated within a single mutual fund. But the IRS language below doesn't seem to distinguish between covered/uncovered.)

IRS Publication 550, p. 46 ( https://www.irs.gov/pub/irs-pdf/p550.pdf
You can figure your gain or loss using a [FIFO or Specific ID] cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund.

Yes, you're assumptions are correct. I did sell shares of this fund (prior to 2012) and I did, at that time, establish the cost average basis. I did not then, nor have I since kept any records of my purchases and sales of shares within this fund. When I look at my fund on VanG's website, it shows average cost basis as the method. Yet, when I got to sell, it asks me to declare a cost basis method as if I'd never declared one before. Maybe it's just asking for the method for the newer covered shares or maybe it's just some kind of software function being that I haven't sold any shares since prior to 2012 when Vanguard took over the record keeping.

To repeat, VanG does break the fund listing into covered and uncovered, but even the covered shares show no buy/sell history in contrast to my SpecID funds which show a detailed buy/sell history.
(Or maybe your main question is how you can get at just the (apparently lower average cost basis) pile of covered shares, to sell them before selling the uncovered shares. And that is a different question from whether you can change the cost basis accounting method, which may not be your main concern. )
Yes, that's my main concern. Unrealized gain on the uncovered share portion is around 65% and about 30% on the covered portion. It just seems to me that the solution was wrapped up in the issue with the cost basis. Because I've kept no personal records on the uncovered OR on the covered shares and because Vanguard apparently isn't keeping records on the covered shares (post 2012) either, I'm not sure how I'd ever be able to change the cost basis method to Uncle Sam's liking. Even so, it would be nice if I could at least sell the covered shares portion of the investment even if I sold that portion all at the average-cost-basis method. What Vanguard is telling me is that not only must I use the average cost basis method, but that I must use that method AND sell all the uncovered shares first before dipping into the covered shares. I don't even get the advantage of grouping all the shares together and selling them at their collective average cost basis which would be lower than 65%.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

goingup wrote: Fri Nov 17, 2017 8:53 am
bobsmith wrote: Fri Nov 17, 2017 8:35 am
goingup wrote: Thu Nov 16, 2017 3:05 pm You do not have to sell uncovered shares first. Or ever.
Only the covered shares will change when you select SPEC ID--those purchased after 2012.
What you say makes sense, but when I called Vanguard, they said I would have to sell the uncovered shares first, no matter what. Have you actually confirmed this can be done as you say?
Yes. Last year I sold covered shares of VWIUX (Int. Tax Exempt Bond) and left all uncovered shares unsold.

Step back and think about this for a moment. Do you really think a broker is going to tell you which shares you have to sell first? That wouldn't make any sense. It's your money!!

You are misunderstanding something that Vanguard is telling you, but I'm not sure what they are trying to tell you. It doesn't really matter though, does it? Just go into your taxable account and change the cost basis to SPEC ID. If you sell uncovered shares, they'll be recorded at average cost. If you sell covered shares, you'll have the actual SPECIFIC ID.
Again, what you say makes sense, but what I was told by the Vanguard rep contradicts what you're saying worked for you. I guess there's really no downside to trying what you suggest except that I might be creating a situation where I have two different cost basis methods for one fund. Even if that somehow works within the framework of Vanguard's website software, I'm not sure if it's legit with the IRS. I guess the assumption would be that when I select SpecID, it will assign that to ONLY the covered shares and leave the uncovered shares as average-cost basis. Then I can only hope the Vanguard somehow retroactively shows the buy/sell history of those covered shares so that I can actually utilize the SpecID method. Right now, there is NO such shown history at Vanguard for those covered shares.

I your case with VWIUX, had you previously declared average-cost-basis they way I had with my fund, only to change it later to SpecID for the covered shares and then only years after the method for those covered shares and been left undetermined?
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by livesoft »

You can always call Vanguard again and see if you get a different answer than your previous call. :twisted:

Personally, I don't think the demarcation will be the covered / non-covered date necessarily. That's because if you sold shares AFTER that date, but did not use Specification Identification, then ALL the shares purchased up to that sell date would have to use Average Cost if you filed a tax return that reported Average Cost for that sale on Schedule D.

Example: You bought shares in 2013 & 2014 and sold shares in 2014. Then you bought shares in 2015. The 2015 covered shares could be specific id, but the covered shares purchased in 2013 and 2014 would be average cost as determined already by that sale in 2014.
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bobsmith
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

livesoft wrote: Fri Nov 17, 2017 9:16 am You can always call Vanguard again and see if you get a different answer than your previous call. :twisted:

Personally, I don't think the demarcation will be the covered / non-covered date necessarily. That's because if you sold shares AFTER that date, but did not use Specification Identification, then ALL the shares purchased up to that sell date would have to use Average Cost if you filed a tax return that reported Average Cost for that sale on Schedule D.

Example: You bought shares in 2013 & 2014 and sold shares in 2014. Then you bought shares in 2015. The 2015 covered shares could be specific id, but the covered shares purchased in 2013 and 2014 would be average cost as determined already by that sale in 2014.
Thanks for the reply. Well, maybe I'll call Vanguard back and instead of asking for advice on how to use the online sale, I'll just ask him/her to do it over the phone asking questions as I go. To be clear, the only shares I sold were back before 2010, and the only shares I've purchased where those bought by way of the fund being set to reinvest. I didn't even realize a you could own a fund with different shares of that fund (in the same account) using different cost-basis methods. When/if I call Vanguard back to make the sale it won't be until late December, but I'll post back if I have anything to share. Meanwhile I'm still keeping an eye on this thread.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by livesoft »

bobsmith wrote: Fri Nov 17, 2017 12:06 pm I didn't even realize a you could own a fund with different shares of that fund (in the same account) using different cost-basis methods.
You couldn't do that until the tax laws changed in 2012. Since your last sale was before 2010, I would think that ALL your covered shares could have a Cost Basis method of Specific ID and even your non-covered shares since your last sale could have a Cost Basis method of Specific ID.

Certainly, Vanguard has my non-covered shares purchased in 2009 listed with a Cost Basis method of Specific ID. However, the web site also states that if/when I sell those share that Vanguard will not report the cost basis to the IRS on the 1099-B. That doesn't matter to me at all as I know the cost basis. Furthermore, so does Vanguard as they have a record of all my transactions going back many years. The fact that (unlike my other brokers) Vanguard refuses to track the non-covered shares cost basis is ridiculous. And even though Vanguard won't report the Cost Basis to the IRS, Vanguard will tell me the average cost basis to put on my tax return (which is something that I will not do since I am using Specific Identification even for the non-covered shares).
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livesoft
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by livesoft »

And here is a link to a previous discussion with a link to some IRS regulations posted by sscritic that may be helpful:
viewtopic.php?t=143743
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bobsmith
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

livesoft wrote: Fri Nov 17, 2017 6:23 pm And here is a link to a previous discussion with a link to some IRS regulations posted by sscritic that may be helpful:
viewtopic.php?t=143743
Yes that was helpful. One thing that old thread referenced was the idea to use VanG's transaction history for your own record keeping when it came to IRS reporting. I could probably do that with the covered shares if necessary. However, at this point if I could just sell the covered shares portion of the investment all together at once using average-cost-basis for those only, that would be a good solution for me.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by livesoft »

bobsmith wrote: Sat Nov 18, 2017 10:07 am However, at this point if I could just sell the covered shares portion of the investment all together at once using average-cost-basis for those only, that would be a good solution for me.
You cannot do that, so that won't be a solution for you. As soon as you are using Average Cost, that means you must sell shares on a first-in, first-out specification.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by ubermax »

livesoft wrote: Sat Nov 18, 2017 1:12 pm
bobsmith wrote: Sat Nov 18, 2017 10:07 am However, at this point if I could just sell the covered shares portion of the investment all together at once using average-cost-basis for those only, that would be a good solution for me.
You cannot do that, so that won't be a solution for you. As soon as you are using Average Cost, that means you must sell shares on a first-in, first-out specification.
I partially agree with Livesoft - Through the 2016 tax year I used two spreadsheets to confirm Vanguard's calculation of the covered/non-covered situation for a particular mutual fund , one has all transactions from initial purchase up to the sale of the last remaining shares that existed as of 12/31/2011 - the gain or loss on all sales since that date were based on the average cost per share as of the last transaction in 2011 which was a monthly dividend on 12/30/2011 - so in a sense I guess it can be thought of as : "share balance as of 12/31/2011 is considered first wrt redemptions after that date " but I wouldn't call that FIFO

My other spreadsheet only reflects the positive inflows to the fund starting on 1/1/2012 until the pre-2012 shares were exhausted in 2016 ; the gain or loss on share sales after that point is based on the average cost per share not FIFO of all transaction activity since 1/1/2012.

With this methodology I matched Vanguard's numbers which doesn't mean I'm right but I feel comfortable with the approach .
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

livesoft wrote: Sat Nov 18, 2017 1:12 pm
bobsmith wrote: Sat Nov 18, 2017 10:07 am However, at this point if I could just sell the covered shares portion of the investment all together at once using average-cost-basis for those only, that would be a good solution for me.
You cannot do that, so that won't be a solution for you. As soon as you are using Average Cost, that means you must sell shares on a first-in, first-out specification.
I'm a little confused. I don't mean to be overbearing, but to be clear, are you saying that in THIS case of having covered and uncovered shares, if I choose average cost basis method that it would really lead me to a FIFO method instead? And in this case, you're saying that would mean I was using FIFO just for the covered shares, right? In my OP example, I have already "declared" average cost basis because I know I sold some shares of this fund, although that was before 2012. My funds were broken up into covered and uncovered shares long after my last sale.

Also, more generally... let's say, post 2012, I purchase shares of a new Vanguard mutual fund for the first time and I immediately declare SpecID. Time goes by, I buy a few more and it's also reinvesting, etc. Then, a couple years later, logged on and doing the transactions via Vanguard's website, I cherry pick some shares to sell using Vanguard's data for those shares. This is all reported on the 1099, right? Should I be keeping my own records or will Vanguard's record keeping be enough for the IRS? If I'm ever audited, can I rely on Vanguard's 1099 for that year or will the IRS want more?

Lastly, if I keep my on records for a sale of funds that I reported to the IRS using SpecID, how long must I keep those records to prove my purchase/sell dates? Seven years?
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by livesoft »

Whenever one sells at Average Cost, one sells shares FIFO. One can also sell with Specific ID and identify the shares to shares FIFO.

FIFO is a method of identifying shares for record keeping. It is not a cost basis method. I can also say this: If you sell the first shares you bought, what is the cost basis that you will choose? If this is the first time you sold shares, then you have a choice: The average basis of all the shares you have purchased up to the time of the sale (average cost) or the actual cost of the shares that you are selling (specific identification). When a broker says FIFO is a cost basis method, they are actually using a subset of Specific Identification. I think that just confuses everyone.
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bobsmith
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

livesoft wrote: Mon Nov 20, 2017 7:28 am Whenever one sells at Average Cost, one sells shares FIFO. One can also sell with Specific ID and identify the shares to shares FIFO.

FIFO is a method of identifying shares for record keeping. It is not a cost basis method. I can also say this: If you sell the first shares you bought, what is the cost basis that you will choose? If this is the first time you sold shares, then you have a choice: The average basis of all the shares you have purchased up to the time of the sale (average cost) or the actual cost of the shares that you are selling (specific identification). When a broker says FIFO is a cost basis method, they are actually using a subset of Specific Identification. I think that just confuses everyone.
Thank you for this and so many other clarifications, not to mention your patience in hanging with me.

I understand your point about FIFO and SpecID, but does seem Vanguard draws a distinction between SpecID and FIFO, but maybe this is just a convenience for the customer when selling online?
https://investor.vanguard.com/taxes/cost-basis/methods

What I'm having trouble understanding is how average cost basis can be considered the same as FIFO or SpecID. With average costs basis, you just gather all the purchases over all time in the fund, compare them as a group to the sale price, and use that percent of unrealized gain for all sales of shares, right? How can that be the same thing as FIFO? Sorry, I feel I'm missing something obvious here.

Just to recap and add details to my OP: I initially purchased shares in this fund around 2002, sold and/or purchased shares before 2010, but have done nothing since. The fund was always set to reinvest gains until around 2015, when I directed all gains to reinvest to a different fund. In other words, the only reason I have any covered shares at all is because the fund was set to reinvest. I am certain that prior to 2010 whenever I sold or bought shares that I initially declared the cost average basis, then used it then on. Now when I look at the fund, it separates into covered and uncovered shares, but even the covered shares show no buy sell history at Vanguard's website, even though other funds for which selected SpecID, clearly do show their history. Looking at the fund, it's clearly notated as "average cost." Recently, when I tried to initiate an online "test" sale of shares from this fund (for the first time since before 2010), it surprised me by prompting me to select a cost basis method. I backed out of the test sale and that's what brought me here with questions. As you say, I should get a choice the first time, but yet I'm being asked again perhaps because of the "covered" share portion, or perhaps because (as I learned from you) that the rules have changed and now it is allowable to change the cost basis method for newly purchased shares.
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Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by livesoft »

bobsmith wrote: Mon Nov 20, 2017 9:33 am What I'm having trouble understanding is how average cost basis can be considered the same as FIFO or SpecID. With average costs basis, you just gather all the purchases over all time in the fund, compare them as a group to the sale price, and use that percent of unrealized gain for all sales of shares, right? How can that be the same thing as FIFO? Sorry, I feel I'm missing something obvious here.
Let me give an example:

You buy shares on 4 occasions. I am making up dates, prices, etc, so don't look to see if they are on weekends :) ->

Code: Select all

Lot     Date       #shares      Total Cost of Lot
1     1/12/2002    50 sh        $1000.00
2     2/16/2003    50 sh        $1200.00
3     3/17/2008    60 sh        $2400.00
4     4/11/2013    60 sh        $2000.00
The total numbers of shares purchased is 220 shares and the total cost of all shares is $6600. The average cost of a share is thus $30.00

If you sell 50 shares with Average cost basis on 5/22/2014, then you sell the first 50 shares you bought. That is, the first shares in are the first shares out. The average cost of these 50 shares is $1500.00.

If you sell 50 shares with Specific ID method on 5/22/2014, but do not tell Vanguard which shares you want to sell, then you sell the first 50 shares you bought and the cost basis is $1000.00. That is, the first shares in are the first shares out.

If you sell 50 shares with Specific ID method on 5/22/2014 and tell Vanguard to sell the 1/12/2002 lot, then you sell the first 50 shares you bought and the cost basis is $1000. That is, the first shares in are the first shares out.

Then if at Vanguard you to use their FIFO method, then you have Vanguard specifically identify the first 50 shares for you then you sell the first 50 shares you bought and the cost basis is $1000. That is, the first shares in are the first share out.

Finally, in the old days, if one told Vanguard to sell 50 shares without specifying which shares and without specifying which cost basis method to use, then you sell the first 50 shares you bought and you got to choose the cost basis method on your Form 1040 Schedule D when you filled out your tax return and submitted it to the IRS. It was up to you to decide at that time whether you used Average Cost or Actual Cost (i.e. what is now called Specific ID or FIFO). But since you didn't specify which shares, the IRS rules said you sold the First Shares In. Furthermore, once you made the choice (which you wrote down on Schedule D), you were stuck with it for all future sales of that investment.

Do you see how which shares sold is a separate issue from the Cost Basis?

Summary:
I have given you 5 possible ways to sell 50 shares. There are other ways, too. But in all these 5 cases, the first shares in were sold. That is, the first shares in are the first shares out. However, not every case was the basis Average Cost. For some cases the actual cost of the shares was the cost basis. And that's despite the shares being sold FIFO.

One more thing:
If you sold ALL 220 shares, do you see how the Cost Basis would be $6600 whether you used Average Cost or Specific Identification or FIFO?
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FactualFran
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Joined: Sat Feb 21, 2015 1:29 pm

Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by FactualFran »

bobsmith wrote: Mon Nov 20, 2017 9:33 am I understand your point about FIFO and SpecID, but does seem Vanguard draws a distinction between SpecID and FIFO, but maybe this is just a convenience for the customer when selling online?
https://investor.vanguard.com/taxes/cost-basis/methods
FIFO can be considered to be a preset way of determining what shares are sold. A term used instead of preset way is "standard order". Some brokerages have standing orders on sales in addition to FIFO, such as highest cost first (known as HIFO). With SpecID you manually select what shares to sell. A standing order automatically does the selection.
bobsmith wrote: Mon Nov 20, 2017 9:33 am What I'm having trouble understanding is how average cost basis can be considered the same as FIFO or SpecID. With average costs basis, you just gather all the purchases over all time in the fund, compare them as a group to the sale price, and use that percent of unrealized gain for all sales of shares, right? How can that be the same thing as FIFO? Sorry, I feel I'm missing something obvious here.
The average basis method is not the same as other methods, such as FIFO and SpecID. At least at one time, the income tax form on which capital gain transactions were reported has a column with a title like "Cost of Other Basis". FIFO and SpecID are cost methods. Average Basis is an other basis method.
bobsmith wrote: Mon Nov 20, 2017 9:33 amJust to recap and add details to my OP: I initially purchased shares in this fund around 2002, sold and/or purchased shares before 2010, but have done nothing since. The fund was always set to reinvest gains until around 2015, when I directed all gains to reinvest to a different fund. In other words, the only reason I have any covered shares at all is because the fund was set to reinvest. I am certain that prior to 2010 whenever I sold or bought shares that I initially declared the cost average basis, then used it then on. Now when I look at the fund, it separates into covered and uncovered shares, but even the covered shares show no buy sell history at Vanguard's website, even though other funds for which selected SpecID, clearly do show their history. Looking at the fund, it's clearly notated as "average cost." Recently, when I tried to initiate an online "test" sale of shares from this fund (for the first time since before 2010), it surprised me by prompting me to select a cost basis method. I backed out of the test sale and that's what brought me here with questions. As you say, I should get a choice the first time, but yet I'm being asked again perhaps because of the "covered" share portion, or perhaps because (as I learned from you) that the rules have changed and now it is allowable to change the cost basis method for newly purchased shares.
Concerning: "I am certain that prior to 2010 whenever I sold or bought shares that I initially declared the cost average basis", any such declaration was to the IRS. Vanguard is not involved with the cost or other basis method of non-covered shares beyond the fact that Vanguard provides, as a convenience, the average basis information for non-covered shares.

When you did a "test" sale, Vanguard asked you to specify the cost or basis method for covered share likely because you did not previous specify one. The method was Average Basis by default. I am surprised that Vanguard did not ask how many of the shares being sold were from the covered group and how many were from the non-covered group, assuming that there were some non-covered shares in the account.
Tramper Al
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Joined: Thu Oct 18, 2007 11:42 am

Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by Tramper Al »

When I make a partial transfer of mutual fund shares between say Wells Fargo and Vanguard, there is a rule followed (in this case FIFO) to determine the (covered) cost basis of the shares transferred is (under specific ID). So it's actually a way to isolate shares of a given type/date. Since some brokerages (I believe Vanguard included) won't let me ID shares with a sell order (at least the way I do it online), I have resorted to partial transfers in order to sequester the fund shares I am considering selling, so that a sell all order will accomplish what I intend. Basically, for the covered cost basis era, I try hard to match up what the brokerage will report via 1099B with what I wish to report on Schedule D via specific ID.

And a question. Are some suggesting above that one can hold a mix of same fund at same broker that is partly average cost method (the older uncovered) shares and partly specific ID (the newer covered shares)? I have always understood that a cost method election for a mutual fund was forever.
FactualFran
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Joined: Sat Feb 21, 2015 1:29 pm

Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by FactualFran »

Tramper Al wrote: Mon Nov 20, 2017 1:43 pm And a question. Are some suggesting above that one can hold a mix of same fund at same broker that is partly average cost method (the older uncovered) shares and partly specific ID (the newer covered shares)? I have always understood that a cost method election for a mutual fund was forever.
Yes, it is possible to have both non-covered and covered shares of the same security at a brokerage. The non-covered and covered shares may use different cost or basis methods, unless the brokerage makes what is called Single-Account Election, in which case the average basis is calculated using all of the shares, both non-covered and covered, rather than there being a separate average basis for the non-covered shares and for the covered shares.

As wrote in a previous post on this thread
With covered shares, "A taxpayer may change basis determination methods from the average basis method to another method prospectively at any time." See the Chaging Cost Basis Methods web page at fairmark.com.
Topic Author
bobsmith
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Joined: Thu Jan 24, 2013 3:02 pm

Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

livesoft wrote: Mon Nov 20, 2017 10:13 am
bobsmith wrote: Mon Nov 20, 2017 9:33 am What I'm having trouble understanding is how average cost basis can be considered the same as FIFO or SpecID. With average costs basis, you just gather all the purchases over all time in the fund, compare them as a group to the sale price, and use that percent of unrealized gain for all sales of shares, right? How can that be the same thing as FIFO? Sorry, I feel I'm missing something obvious here.
Let me give an example:

You buy shares on 4 occasions. I am making up dates, prices, etc, so don't look to see if they are on weekends :) ->

Code: Select all

Lot     Date       #shares      Total Cost of Lot
1     1/12/2002    50 sh        $1000.00
2     2/16/2003    50 sh        $1200.00
3     3/17/2008    60 sh        $2400.00
4     4/11/2013    60 sh        $2000.00
The total numbers of shares purchased is 220 shares and the total cost of all shares is $6600. The average cost of a share is thus $30.00

If you sell 50 shares with Average cost basis on 5/22/2014, then you sell the first 50 shares you bought. That is, the first shares in are the first shares out. The average cost of these 50 shares is $1500.00.

If you sell 50 shares with Specific ID method on 5/22/2014, but do not tell Vanguard which shares you want to sell, then you sell the first 50 shares you bought and the cost basis is $1000.00. That is, the first shares in are the first shares out.

If you sell 50 shares with Specific ID method on 5/22/2014 and tell Vanguard to sell the 1/12/2002 lot, then you sell the first 50 shares you bought and the cost basis is $1000. That is, the first shares in are the first shares out.

Then if at Vanguard you to use their FIFO method, then you have Vanguard specifically identify the first 50 shares for you then you sell the first 50 shares you bought and the cost basis is $1000. That is, the first shares in are the first share out.

Finally, in the old days, if one told Vanguard to sell 50 shares without specifying which shares and without specifying which cost basis method to use, then you sell the first 50 shares you bought and you got to choose the cost basis method on your Form 1040 Schedule D when you filled out your tax return and submitted it to the IRS. It was up to you to decide at that time whether you used Average Cost or Actual Cost (i.e. what is now called Specific ID or FIFO). But since you didn't specify which shares, the IRS rules said you sold the First Shares In. Furthermore, once you made the choice (which you wrote down on Schedule D), you were stuck with it for all future sales of that investment.

Do you see how which shares sold is a separate issue from the Cost Basis?

Summary:
I have given you 5 possible ways to sell 50 shares. There are other ways, too. But in all these 5 cases, the first shares in were sold. That is, the first shares in are the first shares out. However, not every case was the basis Average Cost. For some cases the actual cost of the shares was the cost basis. And that's despite the shares being sold FIFO.

One more thing:
If you sold ALL 220 shares, do you see how the Cost Basis would be $6600 whether you used Average Cost or Specific Identification or FIFO?
Thanks again for indulging me. I totally followed your examples and what you wrote about the methods was actually my original understanding. However, when you said FIFO, I couldn't (in my mind) separate the idea of FIFO as a order of operation verses FIFO as a means of setting the cost basis. With average cost basis I just kept thinking of the shares in terms of a dateless mass of shares, but of course, when it comes down to it you have to sell shares from a certain time period. Still thinking in terms of the "old days", once average cost basis was established for that fund, it didn't matter which shares were sold from which dates as the realized gain would be the same so the idea of FIFO just didn't apply given my mindset.

Anyway, thanks Livesoft. You're one of the pillars of this forum. Thanks for all your patience.

Edit: And now I think I understand why I was told by the Vanguard rep that my uncovered shares would need to be sold first. Not because they were uncovered but because they were the first purchased. The idea of changing the cost basis method must have gotten lost in the conversation as there were a few times where he put me on hold to go check. Anyway, I still might look into whether or not it's worth the hassle of changing the cost basis method for the more newly purchased shares. At least when I call back next time I'll have some idea what I'm talking about. lol.
Topic Author
bobsmith
Posts: 638
Joined: Thu Jan 24, 2013 3:02 pm

Re: Cost basis question about Vanguard's covered/uncovered mutual fund shares

Post by bobsmith »

Just want to say thanks to everyone who posted a reply to help me understand. Even if I didn't respond directly to you, I did read and do appreciate your response.
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