Calculating Capital Gains Taxable Amount

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pascalwager
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Calculating Capital Gains Taxable Amount

Post by pascalwager » Mon May 25, 2020 10:54 pm

I'm considering doing some rebalancing in a taxable account.

Stock fund market value = $93,463
Fund cost basis = $78,793
Capital gain = $14,670
Fund sale = $14,858

What is the taxable amount (not the actual tax)? How do you calculate it?

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Cubicle
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Re: Calculating Capital Gains Taxable Amount

Post by Cubicle » Mon May 25, 2020 11:17 pm

It would be based on the price you purchased each share at. If you bought all shares all at once, each share has the same cost basis. Unless you reinvested dividends.

Presuming you bought all shares all at once & no re-invested dividends, it'd be:

($14,858 / $93,463) * $14,670 = $2,332.12.

I'm pretty sure I'm correct. If I am not, then I'm glad you asked the question so I can find out.
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Small Savanna
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Re: Calculating Capital Gains Taxable Amount

Post by Small Savanna » Mon May 25, 2020 11:27 pm

Cubicle wrote:
Mon May 25, 2020 11:17 pm
It would be based on the price you purchased each share at. If you bought all shares all at once, each share has the same cost basis. Unless you reinvested dividends.

Presuming you bought all shares all at once & no re-invested dividends, it'd be:

($14,858 / $93,463) * $14,670 = $2,332.12.

I'm pretty sure I'm correct. If I am not, then I'm glad you asked the question so I can find out.
Cublcle's calculation is correct if all the shares have the same cost basis, meaning you bought them all at the same time. Now suppose you bought the shares gradually over time, so each share has a different cost basis. If you didn't specify which shares you were selling, your broker will normally assume you wanted to sell the oldest shares first. Then you have to look back through your records to see what you paid for each share. Normally the 1099 form that they send you at the end of the year will list the basis and proceeds for each lot that you sold.

kaneohe
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Re: Calculating Capital Gains Taxable Amount

Post by kaneohe » Mon May 25, 2020 11:32 pm

What is your cost basis method for the fund ? If you didn't select one, what is the default method. Often it is average cost basis. When were the shares purchased.........are they covered or non-covered........the broker will
report the cost basis of the sold shares to you and IRS if covered.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Tue May 26, 2020 1:04 am

pascalwager wrote:
Mon May 25, 2020 10:54 pm
I'm considering doing some rebalancing in a taxable account.

Stock fund market value = $93,463
Fund cost basis = $78,793
Capital gain = $14,670
Fund sale = $14,858

What is the taxable amount (not the actual tax)? How do you calculate it?
I bought the fund in 1995, mainly a couple initial lump sums, and continuous reinvestment of distributions over 25 years.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Tue May 26, 2020 1:13 am

kaneohe wrote:
Mon May 25, 2020 11:32 pm
What is your cost basis method for the fund ? If you didn't select one, what is the default method. Often it is average cost basis. When were the shares purchased.........are they covered or non-covered........the broker will
report the cost basis of the sold shares to you and IRS if covered.
The broker just referred to an overall cost basis: contributions + reinvested dividends (I assume). He confirmed that the cost basis shown on my Positions Screen probably went back to the very beginning in 1995.

kaneohe
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Re: Calculating Capital Gains Taxable Amount

Post by kaneohe » Tue May 26, 2020 3:20 am

pascalwager wrote:
Tue May 26, 2020 1:13 am
kaneohe wrote:
Mon May 25, 2020 11:32 pm
What is your cost basis method for the fund ? If you didn't select one, what is the default method. Often it is average cost basis. When were the shares purchased.........are they covered or non-covered........the broker will
report the cost basis of the sold shares to you and IRS if covered.
The broker just referred to an overall cost basis: contributions + reinvested dividends (I assume). He confirmed that the cost basis shown on my Positions Screen probably went back to the very beginning in 1995.
sounds like the bulk of it is non-covered (covered would be the more recent reinvestments from 2012 or so forward). If you haven't sold any before, you would be free to select specific lots if you sold the non-covered shares. If you had sold any before, if the broker had provided you w/ average cost basis (AVB) and you had used that, you would be locked into AVB unless you got IRS permission to change.

For the covered shares, the cost basis method depends on you and broker. If you didn't make a choice,it would be
broker's default method , often AVB. If you haven't sold any covered shares, the broker might allow you to change that. The first 3 topics here may be helpful https://fairmark.com/?s=cost+basis+methods

Topic Author
pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Tue May 26, 2020 7:05 pm

kaneohe wrote:
Tue May 26, 2020 3:20 am
pascalwager wrote:
Tue May 26, 2020 1:13 am
kaneohe wrote:
Mon May 25, 2020 11:32 pm
What is your cost basis method for the fund ? If you didn't select one, what is the default method. Often it is average cost basis. When were the shares purchased.........are they covered or non-covered........the broker will
report the cost basis of the sold shares to you and IRS if covered.
The broker just referred to an overall cost basis: contributions + reinvested dividends (I assume). He confirmed that the cost basis shown on my Positions Screen probably went back to the very beginning in 1995.
sounds like the bulk of it is non-covered (covered would be the more recent reinvestments from 2012 or so forward). If you haven't sold any before, you would be free to select specific lots if you sold the non-covered shares. If you had sold any before, if the broker had provided you w/ average cost basis (AVB) and you had used that, you would be locked into AVB unless you got IRS permission to change.

For the covered shares, the cost basis method depends on you and broker. If you didn't make a choice,it would be
broker's default method , often AVB. If you haven't sold any covered shares, the broker might allow you to change that. The first 3 topics here may be helpful https://fairmark.com/?s=cost+basis+methods
Thanks,

I think I can do an estimate now prior to making any rebalance sales. I looked at my last year's 1099 form from Schwab and I guess they've been doing tax lots since 1995 for my account.

(This account hasn't been re-balanced since Q4 2011.)

kaneohe
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Re: Calculating Capital Gains Taxable Amount

Post by kaneohe » Tue May 26, 2020 7:14 pm

if you want to confirm your conclusion, you can call Schwab and ask for the cost basis group. They are generally quite knowledgeable but you may need to push back if you think you are not getting the right answer.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Thu May 28, 2020 2:34 pm

I did the transactions and checked the Schwab realized gains and calculations as follows:

Gains = Proceeds - cost basis

The cost basis was greater than the proceeds, so the gains were negative, both long-term and short-term.

Does that mean the transactions won't be taxed?

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FIREchief
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Re: Calculating Capital Gains Taxable Amount

Post by FIREchief » Thu May 28, 2020 2:55 pm

pascalwager wrote:
Thu May 28, 2020 2:34 pm
I did the transactions and checked the Schwab realized gains and calculations as follows:

Gains = Proceeds - cost basis

The cost basis was greater than the proceeds, so the gains were negative, both long-term and short-term.

Does that mean the transactions won't be taxed?
You must have had some shares that were purchased in the last year and the Brokerage used LIFO (last in, first out) for the sale. Is that correct?
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Thu May 28, 2020 6:09 pm

FIREchief wrote:
Thu May 28, 2020 2:55 pm
pascalwager wrote:
Thu May 28, 2020 2:34 pm
I did the transactions and checked the Schwab realized gains and calculations as follows:

Gains = Proceeds - cost basis

The cost basis was greater than the proceeds, so the gains were negative, both long-term and short-term.

Does that mean the transactions won't be taxed?
You must have had some shares that were purchased in the last year and the Brokerage used LIFO (last in, first out) for the sale. Is that correct?
The account resulted from a lump sum in 1995 and a smaller one about ten years later and was rebalanced quarterly until Q4 2011. Since then, no rebalancing or other activity accept reinvestment of distributions.

Yesterday, Schwab used the average method for determining the taxable amount.

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Re: Calculating Capital Gains Taxable Amount

Post by livesoft » Thu May 28, 2020 6:11 pm

If average cost per share was used (and it was), then ALL the shares could be sold at a loss if ANY of the shares were sold at a loss. Time to tax-loss harvest is what I would say. :)

It is not that this fund was a poor investment necessarily, but it was likely not a tax-efficient investment and threw off taxable distributions every year. Or maybe it was an international fund or an actively managed international fund?
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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Thu May 28, 2020 6:34 pm

livesoft wrote:
Thu May 28, 2020 6:11 pm
If average cost per share was used (and it was), then ALL the shares could be sold at a loss if ANY of the shares were sold at a loss. Time to tax-loss harvest is what I would say. :)

It is not that this fund was a poor investment necessarily, but it was likely not a tax-efficient investment and threw off taxable distributions every year. Or maybe it was an international fund or an actively managed international fund?
The account holds five DFA stock funds: large value, microcap, intl value, intl small cap, and emerging markets. The turnover rates were modest and so were the taxes, I'd say.

I'm thinking about selling about 40% and buying bond funds and doing the reverse in my Vanguard retirement accounts.

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Re: Calculating Capital Gains Taxable Amount

Post by livesoft » Thu May 28, 2020 6:38 pm

But which fund did you sell with average cost per share below the selling price?

I consider bonds in taxable to be tax inefficient for me and they take away room for stocks in taxable that I can do tax-loss harvesting. OTOH, maybe bonds will drop and they can be tax-loss harvested in the near future?
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Re: Calculating Capital Gains Taxable Amount

Post by FIREchief » Thu May 28, 2020 7:10 pm

livesoft wrote:
Thu May 28, 2020 6:11 pm
If average cost per share was used (and it was), then ALL the shares could be sold at a loss if ANY of the shares were sold at a loss. Time to tax-loss harvest is what I would say. :)

It is not that this fund was a poor investment necessarily, but it was likely not a tax-efficient investment and threw off taxable distributions every year. Or maybe it was an international fund or an actively managed international fund?
Yep. I was (wrongly) assuming a passive type fund with low turnover. :oops:
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Thu May 28, 2020 9:30 pm

livesoft wrote:
Thu May 28, 2020 6:38 pm
But which fund did you sell with average cost per share below the selling price?

I consider bonds in taxable to be tax inefficient for me and they take away room for stocks in taxable that I can do tax-loss harvesting. OTOH, maybe bonds will drop and they can be tax-loss harvested in the near future?
Just initial thinking at this point and I appreciate your viewpoint.

If I TLH, I'll need to permanently hold the new funds which will need to be Schwab index funds. Otherwise, there would be $49 purchase fees. Permanent because I'm not allowed to buy new DFA shares.

I've already just purchased a low-cost Schwab intl index (5% turnover) fund to achieve the rebalance. Since Q4 2011, the 51/49 (US/intl) target AA drifted to a recent 64/36 AA.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Thu May 28, 2020 9:36 pm

livesoft wrote:
Thu May 28, 2020 6:38 pm
But which fund did you sell with average cost per share below the selling price?

I consider bonds in taxable to be tax inefficient for me and they take away room for stocks in taxable that I can do tax-loss harvesting. OTOH, maybe bonds will drop and they can be tax-loss harvested in the near future?
I sold from the DFA US large value and microcap funds. Schwab used the gain formula I show above. I could evidently sell 40% (to buy bonds) from each of the six stock funds without paying taxes.

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Re: Calculating Capital Gains Taxable Amount

Post by livesoft » Fri May 29, 2020 6:44 am

I'll have to step away from this thread because I do not really understand how you could have a capital loss in all of these funds if you initially bought them 25 years ago have not really bought more shares except for reinvesting dividends and minor rebalancing until 2011. Things just don't make deep sense to me. That is, I would think that almost all of these remaining DFA fund shares should now have some unrealized capital gains and tax-loss harvesting should not be in play.
I looked at my last year's 1099 form from Schwab and I guess they've been doing tax lots since 1995 for my account.
Your investments could be set up with a cost basis method of Specific Identification as this was definitely available in 1995. But then you wrote
Yesterday, Schwab used the average method for determining the taxable amount.
So those two quoted statements are incongruent to me if they both refer to cost basis methods.
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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Fri May 29, 2020 4:20 pm

livesoft wrote:
Fri May 29, 2020 6:44 am
I'll have to step away from this thread because I do not really understand how you could have a capital loss in all of these funds if you initially bought them 25 years ago have not really bought more shares except for reinvesting dividends and minor rebalancing until 2011. Things just don't make deep sense to me. That is, I would think that almost all of these remaining DFA fund shares should now have some unrealized capital gains and tax-loss harvesting should not be in play.
I looked at my last year's 1099 form from Schwab and I guess they've been doing tax lots since 1995 for my account.
Your investments could be set up with a cost basis method of Specific Identification as this was definitely available in 1995. But then you wrote
Yesterday, Schwab used the average method for determining the taxable amount.
So those two quoted statements are incongruent to me if they both refer to cost basis methods.
I'm going to restudy what the broker was doing in the past, but right now my understanding is they're using the single category average cost method. I read the broker's general discussion for calculating realized gains.

Currently, only Intl LV has a (large) loss, but the overall portfolio does also. Large value, both US and intl, took a big hit in the last few months. Bank stocks, I guess.

The broker simply subtracted the cost basis from the sale value for my two recent sales (LV and microcap) and got negative realized gains across the board. But it seems that I succeeded in avoiding any fees or taxes.

So it looks like I could TLH up to the individual fund cost basis value for the various funds.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Sat May 30, 2020 4:52 pm

kaneohe wrote:
Tue May 26, 2020 3:20 am
pascalwager wrote:
Tue May 26, 2020 1:13 am
kaneohe wrote:
Mon May 25, 2020 11:32 pm
What is your cost basis method for the fund ? If you didn't select one, what is the default method. Often it is average cost basis. When were the shares purchased.........are they covered or non-covered........the broker will
report the cost basis of the sold shares to you and IRS if covered.
The broker just referred to an overall cost basis: contributions + reinvested dividends (I assume). He confirmed that the cost basis shown on my Positions Screen probably went back to the very beginning in 1995.
sounds like the bulk of it is non-covered (covered would be the more recent reinvestments from 2012 or so forward). If you haven't sold any before, you would be free to select specific lots if you sold the non-covered shares. If you had sold any before, if the broker had provided you w/ average cost basis (AVB) and you had used that, you would be locked into AVB unless you got IRS permission to change.

For the covered shares, the cost basis method depends on you and broker. If you didn't make a choice,it would be
broker's default method , often AVB. If you haven't sold any covered shares, the broker might allow you to change that. The first 3 topics here may be helpful https://fairmark.com/?s=cost+basis+methods
Re the example at the beginning of the second topic in your linked article about cost basis methods.

Both Vanguard and Schwab apply average cost method differently than the example. They use the following simple formula: Gains = Proceeds - Cost Basis.

But the topic example calculates average cost basis/share and then applies this on a FIFO basis. Completely different results: $3,300 loss (Vg and Schwab) versus $200 gain (topic version).

Both methods make sense/seem plausible, but I guess there are different versions of the average cost method that are accepted by the IRS?

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Sat May 30, 2020 5:02 pm

FIREchief wrote:
Thu May 28, 2020 2:55 pm
pascalwager wrote:
Thu May 28, 2020 2:34 pm
I did the transactions and checked the Schwab realized gains and calculations as follows:

Gains = Proceeds - cost basis

The cost basis was greater than the proceeds, so the gains were negative, both long-term and short-term.

Does that mean the transactions won't be taxed?
You must have had some shares that were purchased in the last year and the Brokerage used LIFO (last in, first out) for the sale. Is that correct?
Only reinvested dividends. Broker uses average cost method to my knowledge. Gains = proceeds - actual cost basis.

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pascalwager
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Re: Calculating Capital Gains Taxable Amount

Post by pascalwager » Sun May 31, 2020 1:19 am

I figured out my error when using the average cost method. I was using the total fund cost basis rather than the cost basis for the proceeds shares. So, I no longer think there are different average cost method versions, just one as far as I know.

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