I want to use Specific id - But....

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Keep It Simple
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I want to use Specific id - But....

Post by Keep It Simple » Wed Feb 15, 2012 6:51 am

I am warming up to the idea of using specific id as I see a definite benefit from a taxation viewpoint, but I do have a few questions. Given that I have many transactions in my taxable account prior to January 1, 2012 and since I was using average cost basis I have not needed to track any lots I have sold, so does this present a problem if I choose to use specific id method moving forward on these same funds? In other words, do I now need to use specific id on the selling of shares before Vanguard started tracking lots this year if I choose to use specific id moving forward. How can I do this if I was not tracking it in the past?

Thank you!

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Re: I want to use Specific id - But....

Post by Kevin M » Wed Feb 15, 2012 7:22 am

If you have sold shares of a mutual fund and used average basis, you must continue to use average basis when selling shares bought before 2012.

If you have not sold any shares of a particular mutual fund, you can use specific ID when you sell shares bought before 2012, but for Vanguard funds, you will need to use your own records to determine basis for each tax lot. You can get this from your Vanguard statements if you haven't been tracking it elsewhere.

If you select Spec ID for a mutual fund at Vanguard, VG will track lots for you going forward, and you can use Spec ID when selling shares purchased on or after Jan 1, 2012. When selling shares purchased prior to 2012, you can continue to use average basis, and Vanguard says they will continue to provide you with average basis information for those (noncovered) shares.

Note that if you select SpecID, you will not be able to specify a dollar amount when you sell shares, but will have to specify a number of shares to sell, even for noncovered shares (purchased prior to 2012). While making the sale or exchange, you can switch to FIFO to sell a dollar amount, but you still can use average basis for tax reporting, and can still use Spec ID when selling covered shares (purchased in 2012 or later) (kind of confusing, eh?).

Here is a link to a thread where Vanguard rep Rebecca Katz answered many questions about this topic: http://www.bogleheads.org/forum/viewtop ... 10&t=87863

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Re: I want to use Specific id - But....

Post by sscritic » Wed Feb 15, 2012 8:53 am

Kevin M wrote:If you have sold shares of a mutual fund and used average basis, you must continue to use average basis when selling shares bought before 2012.
I dispute this claim which has often been repeated. Please read this (imagine W is Wells Fargo and L is Vanguard, a regulated investment company - the customer uses his brokerage account at Wells Fargo to buy share of a Vanguard mutual fund):
Example 2. (i) Taxpayer D enters into an agreement with W Custodian establishing an account for the periodic acquisition of shares of L Company, a regulated investment company. W acquires for D’s account shares of L Company stock on the following dates and amounts:

Date ................ Shares ..... Cost
January 8, 2010 .... 25 .... $200 [$8 per share]
February 8, 2010 .. 24 ..... 200 [$8.333 per share]
March 8, 2010 ...... 20 ..... 200 [$10 per share]
April 8, 2010 ........ 20 ..... 200 [$10 per share]

(ii) At D’s direction, W sells 40 shares from the account on January 15, 2011, for $10 per share or a total of $400. D elects to use the average basis method for the shares of L Company. The average basis for the shares sold on January 15, 2011, is $8.99 (total cost of shares, $800, divided by the total number of shares, 89).

(iii) Under paragraph (e)(7)(ii) of this section, the shares sold are the shares first acquired. Thus, D realizes $25.25 ($1.01 * 25) long-term capital gain for the 25 shares acquired on January 8, 2010, and $15.15 ($1.01 * 15) short-term capital gain for 15 of the shares acquired on February 8, 2010.

Example 3. (i) The facts are the same as in Example 2, except that on February 8, 2011, D changes to the first-in, first-out basis determination method. W purchases 25 shares of L Company for D on March 8, 2011, at $12 per share. D sells 40 shares on May 8, 2011, and 34 shares on July 8, 2012.

(ii) Because D uses the first-in, first-out method, the 40 shares sold on May 8, 2011 are 9 shares purchased on February 8, 2010 [edit: remember, he already sold 15 of the February 8 shares on January 15], 20 shares purchased on March 8, 2010, and 11 shares purchased on April 8, 2010. Because, under paragraph (e)(7)(v) of this section, the basis of the shares D owns when D changes from the average basis method remains the same, the basis of the shares sold on May 8, 2011, is $8.99 per share, not the original cost of $8.33 per share for the shares purchased on February 8, 2010, or $10 per share for the shares purchased on March 8, 2010, and April 8, 2010. The basis of the shares sold on July 8, 2012, is $8.99 per share for 9 shares purchased on April 8, 2010, and $12 per share for 25 shares purchased on March 8, 2011.
Read example 3 carefully. There were non-covered shares. Some shares were sold using average basis. There was then a change from average basis. Covered shares were purchased after the change from average basis. A sale of the non-covered shares was made after the change in basis and that new purchase. In the past, when any of the shares were sold, average basis was required and the average would include all the shares owned at the time. Under the new rules, average basis is not required. The basis of the old shares is what the average was ($8.99), but not the average that you would calculate using all the shares owned at the time. This follows from
the basis of each share of stock immediately after the change is the same as the basis immediately before the change.
Note that all shares in the example were bought before 2012.

My information is from the Treasury Department (Internal Revenue Service) as published in the Federal Register. See § 1.1012–1(e)(9)(iv)

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Re: I want to use Specific id - But....

Post by damjam » Wed Feb 15, 2012 10:50 am

I'm confused, which is often the case. :)
I thought prior to Jan 1, 2012, if you had chosen a cost basis method for a mutual fund holding and used it (ie. sold some of your holding), you could not change methods.
In the examples provided, doesn't Company L refer to stocks not mutual funds?
Please correct me.

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Re: I want to use Specific id - But....

Post by sscritic » Wed Feb 15, 2012 11:06 am

Regulated Investment Company
(a) General rule
For purposes of this subtitle, the term “regulated investment company” means any domestic corporation—
(1) which, at all times during the taxable year—
(A) is registered under the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 to 80b–2) as a management company or unit investment trust, or
(B) has in effect an election under such Act to be treated as a business development company, or
(2) which is a common trust fund or similar fund excluded by section 3(c)(3) of such Act (15 U.S.C. 80a–3 (c)) from the definition of “investment company” and is not included in the definition of “common trust fund” by section 584 (a).
In simple terms, regulated investment company is the technical term for a mutual fund.

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Re: I want to use Specific id - But....

Post by sscritic » Wed Feb 15, 2012 11:24 am

damjam wrote:I'm confused, which is often the case. :)
I thought prior to Jan 1, 2012, if you had chosen a cost basis method for a mutual fund holding and used it (ie. sold some of your holding), you could not change methods.
The regulations were published in October, 2010. They applied during 2011. However, since Vanguard was not responsible for reporting basis information to the IRS, what they offered and what you could do on your own were separate issues.

Here is one of the key lines:
the final regulations provide that a basis determination method for stock is not a method of accounting and a change in
a method of determining basis for stock is not a change in method of accounting to which sections 446 and 481 apply.
If you read the old IRS pubs, you needed permission from the Commissioner to change the basis. That was because changing the basis was a change in the method of accounting. By a clever use of words, the new regulations say that changing your basis is not a change in a method of accounting, so you no longer need the permission of the Commissioner.
DATES: Effective Date: These regulations are effective on October 18, 2010.
Applicability Date: For dates of applicability, see §§ 1.1012–1(c)(10), 1.1012–1(e)(12), 1.6045A–1(d), and 1.6045B–1(g).
Here is 1.1012–1(e)(12)
(12) Effective/applicability date. Except as otherwise provided in paragraphs (e)(1), (e)(2), (e)(7), (e)(9), and (e)(10) of this section, this paragraph (e) applies for taxable years beginning after October 18, 2010.
So let's back up to 1.1012–1(e)(10)
(10) Application of average basis method account by account—(i) In general. For sales, exchanges, or other dispositions on or after January 1, 2012, of stock described in paragraph (e)(1)(i) of this section, the average basis method applies on an account by account basis.
Note that this refers to the date of sale, not the date of purchase. 1.1012–1(e)(9) makes similar references to sales after 1/1/2012.

So the regulations are clear. You could change your basis October 18, 2010 to be used during tax year 2011. The rules governing how to average (all your shares or each account separately) changed on 1/1/2012. Vanguard's reporting requirements for the mutual funds also changed on 1/1/2012, but the regulations on whether you could change your basis changed back in October, 2010. At least that's the way I read things.

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Re: I want to use Specific id - But....

Post by sscritic » Wed Feb 15, 2012 11:31 am

P.S. I believe the wiki to be wrong about 2011, as the example clearly shows. Note that Vanguard never told you that you could write to them in 2011 to change your basis from average basis to Specific ID, but the IRS said that you could. I believe that Vanguard (rightly) was putting their efforts into getting ready for 2012. Think about it, how many of their customers would have been able to understand the examples from the Federal Register that I copied above? The wiki writers didn't read it the way I read it, but that proves that one of us had difficulty reading, and I believe that both the wiki writers and I have above average reading skills. This stuff is tough and not easy for an average Vanguard customer.

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Re: I want to use Specific id - But....

Post by damjam » Wed Feb 15, 2012 11:35 am

sscritic thanks for the reply.

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Re: I want to use Specific id - But....

Post by Kevin M » Wed Feb 15, 2012 4:40 pm

sscritic wrote:
Kevin M wrote:If you have sold shares of a mutual fund and used average basis, you must continue to use average basis when selling shares bought before 2012.
I dispute this claim which has often been repeated.
sscritic: Of course you are correct. I was being sloppy, and did not state this point correctly. What I should have said is that the basis of each noncovered share is the average cost of the shares owned prior to the time you switch from average basis to a cost basis method. You switch basis methods by informing your broker, and making a sale using the new basis method. Vanguard's policy is that you have informed them simply by switching basis methods online.

Without even looking at the regs, and assuming Vanguard is applying the regs correctly, I should have known better than to make my original statement. I have selected Specific ID for a fund at Vanguard for which I've previously sold shares using average basis. When I now sell covered shares online, the default is to use Spec ID, but I am warned that I must use my own records to determine my basis.

Incidentally, I cannot sell a dollar amount using Spec ID, but can switch to FIFO to sell a dollar amount (I get the same warning about using my records for basis). There is no option to switch to average basis during the transaction, but if I want, I can cancel the transaction, switch back to average basis for the fund, then do the transaction using average basis, then switch back to Spec ID after completing the transaction.

As you know, we can now switch basis methods at Vanguard at any time for each fund, but once average basis is used for a sale, the basis for all shares owned at that time is the average cost of those shares prior to the sale. The cost basis methods can be used for shares bought subsequently to this sale.

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Re: I want to use Specific id - But....

Post by sscritic » Wed Feb 15, 2012 4:53 pm

Kevin M wrote:[
As you know, we can now switch basis methods at Vanguard at any time for each fund, but once average basis is used for a sale, the basis for all shares owned at that time is the average cost of those shares prior to the sale. The cost basis methods can be used for shares bought subsequently to this sale.
I still claim a minor correction. If you have shares that were bought before an average cost sale, the basis of these shares is set at the existing average. That doesn't mean you can't use specific share ID to sell a specific one of those shares, for example the last one bought rather than the first (say you want a short term loss rather than a long term loss). You aren't specifying the basis, but the particular share by telling Vanguard the date you purchased it. (Actually, specific ID has always been about specifying the date purchased and not the basis - if you have had a wash sale in the past, the basis of your specifically IDed shares might not be what you paid for them.)

At least, that's the way I read the regs and the example.

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Re: I want to use Specific id - But....

Post by Keep It Simple » Wed Feb 15, 2012 5:05 pm

Thank you all for helping to shed some light on this.

It seems to me that people who now want to change from average basis in order to take advantage of Vanguard's upgraded tracking for the specific id method are at a disadvantage since they did not initially track their previous purchases of lots. Since the plan was to never have to track these lots by using average cost, I'm concerned this will be a tremendous hassle to now go back and track all lots purchased prior to 1/1/2012(reinvested dividends etc.). I wonder if it is worth it?

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Re: I want to use Specific id - But....

Post by Kevin M » Wed Feb 15, 2012 5:20 pm

sscritic wrote:
Kevin M wrote:[
As you know, we can now switch basis methods at Vanguard at any time for each fund, but once average basis is used for a sale, the basis for all shares owned at that time is the average cost of those shares prior to the sale. The cost basis methods can be used for shares bought subsequently to this sale.
I still claim a minor correction. If you have shares that were bought before an average cost sale, the basis of these shares is set at the existing average. That doesn't mean you can't use specific share ID to sell a specific one of those shares
Right again! I should have stopped while I was ahead and just left off the last sentence. :roll: How about this instead: You are not restricted to using the average cost of shares bought subsequently to the sale for which average basis was used.

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Re: I want to use Specific id - But....

Post by damjam » Wed Feb 15, 2012 5:22 pm

Keep It Simple wrote: I'm concerned this will be a tremendous hassle to now go back and track all lots purchased prior to 1/1/2012(reinvested dividends etc.).
.



Edit: I'm too confused myself to comment
Last edited by damjam on Thu Feb 16, 2012 10:55 am, edited 2 times in total.

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Re: I want to use Specific id - But....

Post by sscritic » Wed Feb 15, 2012 5:28 pm

Kevin M wrote: Right again! I should have stopped while I was ahead and just left off the last sentence. :roll: How about this instead: You are not restricted to using the average cost of shares bought subsequently to the sale for which average basis was used.

Kevin
Don't feel bad. I think this stuff is harder than social security. It is easy to see why Vanguard didn't want to tell you this (I am not sure that Ms. Katz actually reported it correctly in the Vanguard Cost Reporting thread - but then her job is to know what Vanguard is going to do, not what you can do - she didn't and shouldn't give tax advice). And I could be wrong, which I freely admit.

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Re: I want to use Specific id - But....

Post by Kevin M » Wed Feb 15, 2012 5:29 pm

Keep It Simple wrote: It seems to me that people who now want to change from average basis in order to take advantage of Vanguard's upgraded tracking for the specific id method are at a disadvantage since they did not initially track their previous purchases of lots. Since the plan was to never have to track these lots by using average cost, I'm concerned this will be a tremendous hassle to now go back and track all lots purchased prior to 1/1/2012(reinvested dividends etc.). I wonder if it is worth it?
Perhaps you are missing one of the key points: You can switch to Spec ID, but still use the average cost of shares already purchased to calculate your basis using the Average Cost info provided by Vanguard (or your own records if you prefer).

Vanguard will continue to provide average cost info to you for noncovered shares (purchased prior to 2012), and will provide specific ID cost info to you (and the IRS) for covered shares. I will use the average cost info from Vanguard (which I also track in Quicken) in reporting basis for sales of noncovered shares, and will use the Specific ID info for sales of shares purchased in 2012 and beyond.

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Re: I want to use Specific id - But....

Post by Kevin M » Wed Feb 15, 2012 5:39 pm

sscritic wrote: Don't feel bad.
Thanks. I don't feel bad. I actually think I understand this pretty well, but my articulation doesn't match my understanding. I know I can count on you to help with stating it more accurately and precisely.
I think this stuff is harder than social security.
Now here's where I may disagree with you, at least when it comes to my understanding. I'm in the middle of applying for survivor benefits, and have been told that my kids and I will be getting much less than the family maximum. Can't find anything that supports that in the SSA publications. SSA rep from local office said she would send me the policy info supporting her calculations, but it's been several weeks and I'm still waiting. Two follow up calls have not been returned. When I eventually get the info, may be coming back here for some help.

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Re: I want to use Specific id - But....

Post by sscritic » Wed Feb 15, 2012 5:50 pm

Kevin M wrote: I'm in the middle of applying for survivor benefits, and have been told that my kids and I will be getting much less than the family maximum. Can't find anything that supports that in the SSA publications. SSA rep from local office said she would send me the policy info supporting her calculations, but it's been several weeks and I'm still waiting. Two follow up calls have not been returned. When I eventually get the info, may be coming back here for some help.
Kevin:

If you are willing to send me the particulars by PM, I would be happy to take a look. Don't forget the earnings test. If you have earnings, then your benefits will be reduced, but not your children's (that off the top of my head, so let me make that a qualified statement). My son got survivor benefits (but not my daughter, she was too old), but I didn't even bother to apply as I had a good job and I knew I was way over the limit. My situation had nothing to do with the family max, which has its own rules.

P.S. Sometimes people working at SS get it wrong, and you have to have the regs ready to back you up.

Late P.P.S. It's not your family max, it's the family max of the deceased whose record is the basis of the payments. (I am just making wild guesses about the source of the confusion.)

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Re: I want to use Specific id - But....

Post by grabiner » Wed Feb 15, 2012 9:04 pm

sscritic wrote:
damjam wrote:I'm confused, which is often the case. :)
I thought prior to Jan 1, 2012, if you had chosen a cost basis method for a mutual fund holding and used it (ie. sold some of your holding), you could not change methods.
The regulations were published in October, 2010. They applied during 2011. However, since Vanguard was not responsible for reporting basis information to the IRS, what they offered and what you could do on your own were separate issues.

Here is one of the key lines:
the final regulations provide that a basis determination method for stock is not a method of accounting and a change in
a method of determining basis for stock is not a change in method of accounting to which sections 446 and 481 apply.
If you read the old IRS pubs, you needed permission from the Commissioner to change the basis. That was because changing the basis was a change in the method of accounting. By a clever use of words, the new regulations say that changing your basis is not a change in a method of accounting, so you no longer need the permission of the Commissioner.
Internal Revenue Bulletin 2010-47 makes this easier to understand.
The proposed regulations stated that a change in basis determination method is a change in method of accounting requiring the consent of the Commissioner. A commentator opined that a change to or from the average basis method is not a change in method of accounting that requires the consent of the Commissioner. Another commentator requested that a change to or from the average basis method be allowed without the Commissioner’s consent or that the process be simplified. The commentator suggested that the final regulations require taxpayers to notify their custodians or agents of the change.

The final regulations provide rules governing the time and manner of electing or changing from the average basis method, determining the basis of stock following a change between the average basis method and a cost basis method, and identifying stock sold. The regulations permit taxpayers to elect or change from the average basis method at any time during a taxable year and to choose a method to identify stock sold on a sale-by-sale basis. These rules do not involve the elements of consistency and regularity inherent in methods of tax accounting, which generally apply on the basis of a taxable year. Therefore, the final regulations provide that a basis determination method for stock is not a method of accounting and a change in a method of determining basis for stock is not a change in method of accounting to which sections 446 and 481 apply.
Thus the Wiki was wrong here and I fixed it (by deleting the erroneous information which is no longer relevant). The only rule which changed in 2012 is the requirement to use average basis across all accounts; in 2011, if you held the same mutual fund at Vanguard and in a Fidelity brokerage account, you would have a single average across both. But in 2012, now that Vanguard is reporting the average basis to the IRS based only on what it knows, allowing a separate average on each account makes more sense.
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Off topic: Survivor benefits and family maximum

Post by Kevin M » Wed Feb 15, 2012 10:27 pm

sscritic wrote: Kevin:

If you are willing to send me the particulars by PM, I would be happy to take a look.
I know we're completely off topic here, but want to say thanks, and I will take you up on your offer when I get the paperwork from SSA if I can't figure it out myself.
Don't forget the earnings test.
No earned income. Am well aware of how this works, since I previously received father's benefits after I retired early, and until my youngest daughter turned 16.
P.S. Sometimes people working at SS get it wrong, and you have to have the regs ready to back you up.
That's where your help might come in handy.
Late P.P.S. It's not your family max, it's the family max of the deceased whose record is the basis of the payments.
Yes, I understand this.

Thanks again, and will follow up via PM or maybe a new post if it may be worthwhile for others to learn from (again, once I get something in writing from SSA).

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Re: I want to use Specific id - But....

Post by Keep It Simple » Thu Feb 16, 2012 6:21 am

Perhaps you are missing one of the key points: You can switch to Spec ID, but still use the average cost of shares already purchased to calculate your basis using the Average Cost info provided by Vanguard (or your own records if you prefer).

Vanguard will continue to provide average cost info to you for noncovered shares (purchased prior to 2012), and will provide specific ID cost info to you (and the IRS) for covered shares. I will use the average cost info from Vanguard (which I also track in Quicken) in reporting basis for sales of noncovered shares, and will use the Specific ID info for sales of shares purchased in 2012 and beyond.
I understand what you are saying here, but I am assuming when I go to sell shares, Vanguard is not going to separate my pre-1/1/12 purchases using average cost from my post 12/31/11 specific id purchases on my account screen. Does anyone know how this will be displayed? How do I actually sell non-covered shares using average cost but still sell covered share using specific id as far as Vanguard's interface is concerned?

One more question...for those of you who use specific id rather than average cost, can you please explain what will be different in terms of what info I will have to provide on my tax return? Will Vanguard send forms at the end of the year giving me all the necessary info, or will I have to keep track of it all?
Thank you!

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Re: I want to use Specific id - But....

Post by livesoft » Thu Feb 16, 2012 6:56 am

Keep It Simple wrote:...
One more question...for those of you who use specific id rather than average cost, can you please explain what will be different in terms of what info I will have to provide on my tax return? Will Vanguard send forms at the end of the year giving me all the necessary info, or will I have to keep track of it all?
Thank you!
I have used specific ID for more than 30 years. It's really very easy. I don't even care if Vanguard sends me forms or keeps track of anything on its website because I've been doing specific ID since before web sites existed. Tell me, is there something to fear here? Are you able to add two numbers and get the right answer?
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Re: I want to use Specific id - But....

Post by Keep It Simple » Thu Feb 16, 2012 7:08 am

Tell me, is there something to fear here? Are you able to add two numbers and get the right answer?
Ha - thanks for the laugh...yes I can add.

Here was my question:
for those of you who use specific id rather than average cost, can you please explain what will be different in terms of what info I will have to provide on my tax return?
Thanks!

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Re: I want to use Specific id - But....

Post by livesoft » Thu Feb 16, 2012 7:29 am

There will be no difference to what you have to provide on your tax return. You have always had and alway will have to provide for sales: the date acquired, the cost basis, the date sold, and the sale proceeds. It doesn't matter whether you use specific id, FIFO, HIFO, LIFO for the dates because you still have to provide the dates. It doesn't matter whether you use average basis or actual true basis for the cost basis because you still have to provide the basis.

Believe me, it is a more grueling task to ask these questions than it is to actually fill out your tax return.
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Re: I want to use Specific id - But....

Post by sscritic » Thu Feb 16, 2012 7:43 am

Keep It Simple wrote: I understand what you are saying here, but I am assuming when I go to sell shares, Vanguard is not going to separate my pre-1/1/12 purchases using average cost from my post 12/31/11 specific id purchases on my account screen. Does anyone know how this will be displayed? How do I actually sell non-covered shares using average cost but still sell covered share using specific id as far as Vanguard's interface is concerned?

One more question...for those of you who use specific id rather than average cost, can you please explain what will be different in terms of what info I will have to provide on my tax return? Will Vanguard send forms at the end of the year giving me all the necessary info, or will I have to keep track of it all?
Thank you!
1) I don't think you can do what you want. If you have both non-covered and covered shares in the same account and sell using average basis, all the shares you own will be averaged together to get your average basis. All the covered shares you own at the time will be part of that average and get that same average basis. The piece you quoted was about what basis you will use for your non-covered shares when you sell them using specific ID.
Vanguard will continue to provide average cost info to you for noncovered shares (purchased prior to 2012), and will provide specific ID cost info to you (and the IRS) for covered shares. I will use the average cost info from Vanguard (which I also track in Quicken) in reporting basis for sales of noncovered shares, and will use the Specific ID info for sales of shares purchased in 2012 and beyond.
This is about what Vanguard will tell you, not about how you will sell the shares. So for old shares, you can sell them using specific ID using the Vanguard magic handshake just as you did in 2011 (secure email or phone call or whatever it takes to get the proper confirmation). For new shares, I understand that you can do that on your screen.

There is one problem with this method however. If you last sold shares in September, 2011 and bought new shares in November and December, 2011, these new old shares were not part of the average that established the basis of the old old shares. When you sell them using specific ID, I am not sure if Vanguard will then give the average basis of all your old shares or just your pre-November old shares (any info goes only to you, not the IRS). One thing you could do to set things right is to sell 1 share today using average basis (this assumes you haven't bought any new shares yet this year). This will then capture all your old shares into one average. Even if you have bought new shares, the sale of 1 share will lock in the average for all the old shares, except that average will include your 2012 purchases to date and thus change the basis of your 2012 purchases from what you actually paid to this newly computed average. Now use specific ID from here on out.

2) since we haven't hit year end 2012, I don't know what the form Vanguard will send us will look like. What you put on your tax return will be the same for both types of sales: what you sold, a code, date acquired (could be various), date sold, sales price, cost or other basis, and adjustments. If you sold averaged shares, your cost or other basis is the average basis; if you sold shares that were never averaged, you use what you paid for them, their cost.

The more I think about it, the more I like the idea of selling one share today using average basis to lock in the past so that you can start fresh tomorrow. But I am not ready to do it, I haven't totally convinced myself, so wait for more reaction. Maybe this question needs to be posed to Ms. Katz in the Vanguard Answers Your Questions thread (not the official title). OK. I will try that and see what Ms. Katz says.

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Re: I want to use Specific id - But....

Post by Kevin M » Thu Feb 16, 2012 3:14 pm

Keep It Simple wrote: I understand what you are saying here, but I am assuming when I go to sell shares, Vanguard is not going to separate my pre-1/1/12 purchases using average cost from my post 12/31/11 specific id purchases on my account screen. Does anyone know how this will be displayed? How do I actually sell non-covered shares using average cost but still sell covered share using specific id as far as Vanguard's interface is concerned?
I can't tell you exactly what you'll see, but based on what I have seen so far, I'm virtually certain that Vanguard will separate noncovered and covered shares on the screen. If you want to see for yourself, simply begin a sale transaction for a fund for which you've selected Spec ID as the basis method, then once you've seen how the interface works, cancel the transaction.

For noncovered shares, you can only indicate number of shares to sell online, not which shares. I have seen that already. For covered shares they must show you individual tax lots, since otherwise you wouldn't be able to specifically ID the shares you want to sell.

When you sell noncovered shares for which you have previously used average basis, although you have told Vanguard that you're using Spec ID, the basis of the noncovered shares is computed using average cost. The confusion comes in that the basis method you specify to Vanguard is independent of how the basis is calculated for the noncovered shares. The noncovered shares are actually sold using FIFO (e.g., for purposes of determining short-term from long-term), but the basis is calculated using average cost of shares.

(I'll be surprised if sscritic doesn't find some error in my wording, but this is basically how it works) :wink:

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Re: I want to use Specific id - But....

Post by sscritic » Thu Feb 16, 2012 3:31 pm

Kevin M wrote: When you sell noncovered shares for which you have previously used average basis, although you have told Vanguard that you're using Spec ID, the basis of the noncovered shares is computed using average cost. The confusion comes in that the basis method you specify to Vanguard is independent of how the basis is calculated for the noncovered shares. The noncovered shares are actually sold using FIFO (e.g., for purposes of determining short-term from long-term), but the basis is calculated using average cost of shares.
No error, but I would add one word. What Vanguard shows on their screen for non-covered shares and what Vanguard sends you at the end of the year as their basis have nothing to do with what you should report to the IRS. They might match, and they might not. The problem comes from a purchase of non-covered shares after a sale using average basis that are then sold after you declare that you are using specific ID. I am waiting for an answer in the VANGUARD ANSWERS YOUR QUESTIONS thread to see what they will actually report to you about non-covered shares sold in 2012 in that situation.

Nah, I can't help myself. If you use specific ID, why would they necessarily be FIFO? Can't you pick out any one of your non-covered shares to sell? The basis would be the previously determined average as you say.

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Re: I want to use Specific id - But....

Post by Kevin M » Thu Feb 16, 2012 4:17 pm

sscritic wrote:I am waiting for an answer in the VANGUARD ANSWERS YOUR QUESTIONS thread to see what they will actually report to you about non-covered shares sold in 2012 in that situation.
Yeah, I saw your question there earlier when researching this some more, and a google search led me to your latest post in that thread.
sscritic wrote:Nah, I can't help myself. If you use specific ID, why would they necessarily be FIFO? Can't you pick out any one of your non-covered shares to sell?
No, not with the online interface (at least when I last checked), which is what the question was about; you can only enter number of shares. Also, as I mentioned earlier, you can actually switch to FIFO for noncovered shares during the online transaction, the only purpose being to enable you to specify a dollar amount rather than number of shares (as far as I can tell).

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Re: I want to use Specific id - But....

Post by sscritic » Thu Feb 16, 2012 4:23 pm

Sorry, I missed the online restriction.

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Re: I want to use Specific id - But....

Post by Keep It Simple » Thu Feb 16, 2012 4:24 pm

sscritic wrote:
The problem comes from a purchase of non-covered shares after a sale using average basis that are then sold after you declare that you are using specific ID.
Thank you sscritic and Kevin for looking into this further as I believe we need some more clarification on how Vanguard will handle these pre/post 1/1/2012 sales.

In my particular situation, I have not ever sold any of my current non-covered holdings using the average cost method(I have TLH completely out and back into them, but no sales since then). Does this make my switch to specific id much easier then? Can you explain?

Thank You!

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Re: I want to use Specific id - But....

Post by sscritic » Thu Feb 16, 2012 4:32 pm

Then just start using specific ID. You will have to keep your statements showing what you paid for your pre-2012 shares, and you will have to be sure to follow Vanguard's instructions to sell them using specific ID, but you should be fine.

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Re: I want to use Specific id - But....

Post by damjam » Thu Feb 16, 2012 4:55 pm

Example 2. (i) Taxpayer D enters into an agreement with W Custodian establishing an account for the periodic acquisition of shares of L Company, a regulated investment company. W acquires for D’s account shares of L Company stock on the following dates and amounts:

Date ................ Shares ..... Cost
January 8, 2010 .... 25 .... $200 [$8 per share]
February 8, 2010 .. 24 ..... 200 [$8.333 per share]
March 8, 2010 ...... 20 ..... 200 [$10 per share]
April 8, 2010 ........ 20 ..... 200 [$10 per share]

(ii) At D’s direction, W sells 40 shares from the account on January 15, 2011, for $10 per share or a total of $400. D elects to use the average basis method for the shares of L Company. The average basis for the shares sold on January 15, 2011, is $8.99 (total cost of shares, $800, divided by the total number of shares, 89).

(iii) Under paragraph (e)(7)(ii) of this section, the shares sold are the shares first acquired. Thus, D realizes $25.25 ($1.01 * 25) long-term capital gain for the 25 shares acquired on January 8, 2010, and $15.15 ($1.01 * 15) short-term capital gain for 15 of the shares acquired on February 8, 2010.

Example 3. (i) The facts are the same as in Example 2, except that on February 8, 2011, D changes to the first-in, first-out basis determination method. W purchases 25 shares of L Company for D on March 8, 2011, at $12 per share. D sells 40 shares on May 8, 2011, and 34 shares on July 8, 2012.

(ii) Because D uses the first-in, first-out method, the 40 shares sold on May 8, 2011 are 9 shares purchased on February 8, 2010 [edit: remember, he already sold 15 of the February 8 shares on January 15], 20 shares purchased on March 8, 2010, and 11 shares purchased on April 8, 2010. Because, under paragraph (e)(7)(v) of this section, the basis of the shares D owns when D changes from the average basis method remains the same, the basis of the shares sold on May 8, 2011, is $8.99 per share, not the original cost of $8.33 per share for the shares purchased on February 8, 2010, or $10 per share for the shares purchased on March 8, 2010, and April 8, 2010. The basis of the shares sold on July 8, 2012, is $8.99 per share for 9 shares purchased on April 8, 2010, and $12 per share for 25 shares purchased on March 8, 2011.
I think I finally understand the implications of the above example.
sscritic wrote:The problem comes from a purchase of non-covered shares after a sale using average basis that are then sold after you declare that you are using specific ID.
So using the above example, your asking: what if D purchases 40 shares on January 20, 2011 for $15, what is the cost basis if sold after Feb 8 ,2011? Is that correct?

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Re: I want to use Specific id - But....

Post by Kevin M » Thu Feb 16, 2012 5:46 pm

Keep It Simple wrote:sscritic wrote:
The problem comes from a purchase of non-covered shares after a sale using average basis that are then sold after you declare that you are using specific ID.
Thank you sscritic and Kevin for looking into this further as I believe we need some more clarification on how Vanguard will handle these pre/post 1/1/2012 sales.
Do you mean pre/post 1/1/2012 purchases? I believe sscritic's question is specifically about the basis calculation for noncovered shares--by definition shares purchased before 2012.
In my particular situation, I have not ever sold any of my current non-covered holdings using the average cost method(I have TLH completely out and back into them, but no sales since then). Does this make my switch to specific id much easier then? Can you explain?
What sscritic said about just using Spec ID for all shares if you want. However, it will make no difference in what you see when you sell shares online, and it will not simplify the Vanguard process of identifying specific noncovered shares that you sell. All it does is give you the option to optimize sales of noncovered shares for tax purposes, if you want, because you are not locked into using average cost to compute the basis of your noncovered shares.

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