Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

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teelainen
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Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by teelainen » Mon Jun 10, 2019 11:37 pm

In a taxable account, if someone is dollar cost averaging and buying a little bit of stock every month for 30 years, will that result in a tax preparation nightmare when this person starts selling after so many years?

How does one keep track of cost-basis after so many monthly purchases over 30 years? If you dollar cost average over long periods of time, how do you personally manage your cost-basis? Any tips or advice would be greatly appreciated, thanks.

shiftleft
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by shiftleft » Tue Jun 11, 2019 12:35 am

If you’re starting now, the brokerage should automatically track cost basis for you. I believe there was a tax law change sometime earlier this decade that forced the brokerages to track this for you.

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FIREchief
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by FIREchief » Tue Jun 11, 2019 12:43 am

No. Shares purchased after 1/1/12 are "covered" shares. Your brokerage is required to track and report cost basis. Most can benefit from setting up their accounts as "spec lot" vs. "average cost" basis.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

ohai
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by ohai » Tue Jun 11, 2019 12:48 am

The brokerage keeps track of the cost for every single lot of stock you have bought. When you sell some stock in the future, you just select the cost basis calculation - FIFO, LIFO, or individual lots. At the end of the year, the brokerage sends you a tax form that states your realized gain or loss.

So, in other words, it is relatively easy and you should not worry about record keeping difficulty.

Furthermore, brokerages must transfer cost basis records to new brokerages if you transfer your positions. Before the laws made this mandatory, you might not transfer cost basis records and would default to average cost (I think).

AlohaJoe
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by AlohaJoe » Tue Jun 11, 2019 12:57 am

teelainen wrote:
Mon Jun 10, 2019 11:37 pm
How does one keep track of cost-basis after so many monthly purchases over 30 years?
I use my computer. They are pretty good at keeping track of lists of things. You're only talking about 300-1,000 things. That is a remarkably tiny number of things for a computer to remember. Your phone probably has that many contacts in your address book.

You can just have a simple spreadsheet, using Excel or LibreOffice or Google Sheets. Or you could use one of the many, many pieces of software that do it, from Quicken to ShareSight to beancount. Heck, you could probably just write it down in plain-text in Notepad and be fine.

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teelainen
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by teelainen » Tue Jun 11, 2019 9:00 am

ohai wrote:
Tue Jun 11, 2019 12:48 am
The brokerage keeps track of the cost for every single lot of stock you have bought. When you sell some stock in the future, you just select the cost basis calculation - FIFO, LIFO, or individual lots. At the end of the year, the brokerage sends you a tax form that states your realized gain or loss.
Do you select the cost basis calculation at the time of selling? Or do you select it before you purchase any shares?

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Toons
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by Toons » Tue Jun 11, 2019 9:04 am

Brokerage Tracks,
I use Quicken also
No problems whatsoever.
It is fun.
:happy
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TomatoTomahto
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by TomatoTomahto » Tue Jun 11, 2019 9:06 am

teelainen wrote:
Tue Jun 11, 2019 9:00 am
ohai wrote:
Tue Jun 11, 2019 12:48 am
The brokerage keeps track of the cost for every single lot of stock you have bought. When you sell some stock in the future, you just select the cost basis calculation - FIFO, LIFO, or individual lots. At the end of the year, the brokerage sends you a tax form that states your realized gain or loss.
Do you select the cost basis calculation at the time of selling? Or do you select it before you purchase any shares?
You can select it at any time prior to selling. Afaik, you can even change method under limited circumstances, but I could be wrong. I just select SpecificID and use Quicken to keep track of it (I have "uncovered" shares in addition to the more recent covered). Quicken isn't necessary by any means, but I find the small annual fee to be worth it.

One reason I got rid of automatic dividend reinvestment is that it creates so many lots. I have them all go to a money market, and then periodically invest them in something that's gone south of my asset allocation.
Okay, I get it; I won't be political or controversial. The Earth is flat.

livesoft
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by livesoft » Tue Jun 11, 2019 9:08 am

See this thread to see how Vanguard at least keeps track of someone investing every 2 weeks:
viewtopic.php?t=179414

As others noted, it is NOT a problem at all to do this.
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dbr
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by dbr » Tue Jun 11, 2019 9:09 am

The investor should certainly obtain and retain his own record of what he paid for what.

Whether any of this rises to the level of nightmare depends on the investor.

NotWhoYouThink
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by NotWhoYouThink » Tue Jun 11, 2019 9:18 am

You need to check with your custodian before you buy and before you sell. Schwab makes using Specific ID for mutual funds as difficult as possible, it seems. Easy as pie with Vanguard.

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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by Jack FFR1846 » Tue Jun 11, 2019 9:23 am

Schwab makes life very easy. I have a taxable account there. When selling, I can specify to sell shares with the highest basis for tax loss harvesting or lowest basis to get the most gain or specific lots. At the end of the year, although I kept careful records, their tax statements showed everything I kept track of. Very nice and easy.
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Katietsu
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by Katietsu » Tue Jun 11, 2019 9:40 am

It may not be a nightmare now that brokerages must track your basis. But if you use any basis option besides average cost, it can be unwieldy.

So, for taxable accounts, I typically make larger less frequent purchases rotating the Fund/ETF that I am buying. I did not use automatic dividend reinvestment. So, in the taxable account, I might buy VTI one month and VXUS the next month. Whereas, in the retirement account, I would use a mutual fund with dividend reinvestment with purchases across my desired allocation each time.

dbr
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by dbr » Tue Jun 11, 2019 9:52 am

The fact that your current brokerage tracks the basis does not mean that managing the consequences is not a nightmare if managing the consequences is a nightmare for you. Managing means things like properly electing cost basis methods and making decisions about what to sell when.

ohai
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by ohai » Tue Jun 11, 2019 2:30 pm

TomatoTomahto wrote:
Tue Jun 11, 2019 9:06 am
teelainen wrote:
Tue Jun 11, 2019 9:00 am
ohai wrote:
Tue Jun 11, 2019 12:48 am
The brokerage keeps track of the cost for every single lot of stock you have bought. When you sell some stock in the future, you just select the cost basis calculation - FIFO, LIFO, or individual lots. At the end of the year, the brokerage sends you a tax form that states your realized gain or loss.
Do you select the cost basis calculation at the time of selling? Or do you select it before you purchase any shares?
You can select it at any time prior to selling. Afaik, you can even change method under limited circumstances, but I could be wrong. I just select SpecificID and use Quicken to keep track of it (I have "uncovered" shares in addition to the more recent covered). Quicken isn't necessary by any means, but I find the small annual fee to be worth it.

One reason I got rid of automatic dividend reinvestment is that it creates so many lots. I have them all go to a money market, and then periodically invest them in something that's gone south of my asset allocation.
In all systems I have seen, you have the option of selecting cost basis before executing a sell order. Furthermore, you can usually decide upon cost basis later, up to one day after the trade has been executed.

You can aggregate your tax lots using Quicken or something if you want, but brokerages usually display this information already in an easy to read way.

You don't have to select cost basis when buying stocks - that concept doesn't apply here.

NotWhoYouThink
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by NotWhoYouThink » Tue Jun 11, 2019 2:37 pm

viewtopic.php?t=270543&start=50

As has been reported, Schwab sometimes eases this process by requiring nothing more than signing your name in ink on a piece of paper and mailing it to them, or perhaps calling on a phone during business hours to reach a human who can execute the mutual fund trade for you using spec id. Maybe you could use a landline phone with a rotary dial to make the process feel more authentic.

jebmke
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by jebmke » Tue Jun 11, 2019 3:06 pm

Every few years the market will tank and you will have a chance to sell everything at a loss and consolidate your holdings into one or a few lots with a new basis - in a different asset.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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goingup
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by goingup » Tue Jun 11, 2019 3:12 pm

teelainen wrote:
Mon Jun 10, 2019 11:37 pm
In a taxable account, if someone is dollar cost averaging and buying a little bit of stock every month for 30 years, will that result in a tax preparation nightmare when this person starts selling after so many years?
It's very simple. Your broker keeps track of the basis. That has always been good enough for me. I selected specific ID so I can choose which shares to sell.
Don't get hung up with overthinking the minor details.

afan
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by afan » Tue Jun 11, 2019 3:23 pm

It is a nightmare for lots purchased before brokers were required to track the basis.

Plan to keep until death with stepped up basis?
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by Artsdoctor » Tue Jun 11, 2019 5:10 pm

teelainen wrote:
Mon Jun 10, 2019 11:37 pm
In a taxable account, if someone is dollar cost averaging and buying a little bit of stock every month for 30 years, will that result in a tax preparation nightmare when this person starts selling after so many years?

How does one keep track of cost-basis after so many monthly purchases over 30 years? If you dollar cost average over long periods of time, how do you personally manage your cost-basis? Any tips or advice would be greatly appreciated, thanks.
I can think of plenty of other things that would qualify as a true tax nightmare, but this is not one of them. It's a tax nuisance.

It is true that your broker should keep track of everything for you, and it seems that a lot of people have total faith in their brokers based on this thread.

I have found that I have to reconcile my records with the broker's records. They usually match but occasionally they don't. There have been occasions in the past when I've had to move assets from one account to another (for example, from a joint account into a trust) and it's my responsibility to make sure that specific lots are moved based on my requests--and that is not an automatic slam-dunk. The fewer the number of lots, the easier life is.

If you want to DCA small amounts, you should do it. For me, the small lots have proven to be a nuisance and I've consolidated over the years to make things simpler by getting rid of smaller lots in a variety of ways. I turned off my reinvestment of dividends years ago and made only monthly contributions with those dividends and new contributions. Now, I make only quarterly contributions along with those paid out dividends because I just don't want the bookkeeping hassle of relatively small lots. But this is strictly a personal preference.

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teelainen
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by teelainen » Tue Jun 11, 2019 10:46 pm

Artsdoctor wrote:
Tue Jun 11, 2019 5:10 pm
If you want to DCA small amounts, you should do it. For me, the small lots have proven to be a nuisance and I've consolidated over the years to make things simpler by getting rid of smaller lots in a variety of ways. I turned off my reinvestment of dividends years ago and made only monthly contributions with those dividends and new contributions. Now, I make only quarterly contributions along with those paid out dividends because I just don't want the bookkeeping hassle of relatively small lots. But this is strictly a personal preference.
Artsdoctor, how did you "get rid" of your smaller lots?

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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by stlutz » Tue Jun 11, 2019 11:47 pm

livesoft wrote:
Tue Jun 11, 2019 9:08 am
See this thread to see how Vanguard at least keeps track of someone investing every 2 weeks:
viewtopic.php?t=179414

As others noted, it is NOT a problem at all to do this.
And hourly DCA was addressed in this thread: viewtopic.php?t=132098

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Artsdoctor
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by Artsdoctor » Wed Jun 12, 2019 9:06 am

teelainen wrote:
Tue Jun 11, 2019 10:46 pm
Artsdoctor wrote:
Tue Jun 11, 2019 5:10 pm
If you want to DCA small amounts, you should do it. For me, the small lots have proven to be a nuisance and I've consolidated over the years to make things simpler by getting rid of smaller lots in a variety of ways. I turned off my reinvestment of dividends years ago and made only monthly contributions with those dividends and new contributions. Now, I make only quarterly contributions along with those paid out dividends because I just don't want the bookkeeping hassle of relatively small lots. But this is strictly a personal preference.
Artsdoctor, how did you "get rid" of your smaller lots?
First, I tax-loss harvested throughout the 2008-2009 downturn. I had been investing in Total Stock Market for years and had been reinvesting dividends so I had tiny lots. I "got rid" of nearly all of them by buying Large Cap.

Second, anything that I had left to clean up in subsequent years, I either transferred to my donor advised fund or simply sold (since I had so many carryover losses from 2008-2009).

So for me, the concept of tiny lot annoyance was very real because those were non-covered shares. Nowadays, your broker will take care of this bookkeeping for you but you still have to reconcile that bookkeeping and, if it pertains to you, still keep track of all shares when you start transferring them around (to trusts, to donor advised funds, or even to people).

rantk81
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Re: Will Dollar Cost Averaging Result in a Tax Preparation Nightmare?

Post by rantk81 » Wed Jun 12, 2019 9:12 am

The broker will track it for you. But I recommend tracking it yourself too, just in case the broker screws up.

I have a nightmare of my own right now.

Many years ago, I bought shares of Dow Chemical (DOW) and DuPont (DD). Several odd lots of each, on different dates, over several years. Then things started to get interesting.
DOW spun off another company Chemours (CC).
Later, DOW and DD merged into DWDP.
I acquired more shares of DWDP.
Now DWDP spun/split off into three new tickers, DOW (a different one), DD (a different one), and CTVA.

Fortunately, Interactive Broker's basis-tracking of all of that seems to match pretty close with my spreadsheet. Part of me wants to just sell off all of those shares to get the ugliness out of my record keeping. It's really kind of a mess.

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