Question on cost basis/capital gains in taxable acct

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texags00
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Question on cost basis/capital gains in taxable acct

Post by texags00 » Tue Nov 26, 2019 12:19 pm

I have $100k in a vanguard MF, cost basis method is average cost. If vanguard states the average cost is $75k, and long term capital gains are $25k, will I owe long term capital gain taxes should I sell $75k of that fund?

JediMisty
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Re: Question on cost basis/capital gains in taxable acct

Post by JediMisty » Tue Nov 26, 2019 12:25 pm

Yes. Every dollar of it you sell using the "Average cost basis" will be taxable income at 25% in your example. Try setting the the cost basis to individual lots and see if there is any you can sell at a loss to offset the gain.

livesoft
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Re: Question on cost basis/capital gains in taxable acct

Post by livesoft » Tue Nov 26, 2019 12:26 pm

Yes, you probably will. One cannot simply sell the "cost basis." With average cost, every one of your shares (using the [example] figures you provided) that you sell will have 75% sales price and 25% capital gain.

If you are able to change the cost basis method to "Specific Identification", then every single share that you own will have a cost basis of its cost at the time that you bought the share.
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galawdawg
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Re: Question on cost basis/capital gains in taxable acct

Post by galawdawg » Tue Nov 26, 2019 1:15 pm

Doesn't the taxation of OP's long-term realized capital gains depend on OP's income and tax filing status? Long-term capital gains tax rates can be as low as 0%.

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texags00
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Re: Question on cost basis/capital gains in taxable acct

Post by texags00 » Tue Nov 26, 2019 1:39 pm

Thanks for the replies. My income would put LTC gains at 15%. If i switch the cost basis to the above described methods on Vanguards site will it have records I need to sell the lots I want to avoid LTC tax? All shares were purchased within last 3 years through Vanguard .

livesoft
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Re: Question on cost basis/capital gains in taxable acct

Post by livesoft » Tue Nov 26, 2019 1:43 pm

Just because you switch cost basis method from Average Cost to Specific Identification does not mean that you will avoid realizing capital gains when you sell shares and thus it does not mean you will avoid capital gains taxes when realizing capital gains.
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stan1
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Re: Question on cost basis/capital gains in taxable acct

Post by stan1 » Tue Nov 26, 2019 1:48 pm

texags00 wrote:
Tue Nov 26, 2019 1:39 pm
Thanks for the replies. My income would put LTC gains at 15%. If i switch the cost basis to the above described methods on Vanguards site will it have records I need to sell the lots I want to avoid LTC tax? All shares were purchased within last 3 years through Vanguard .
Yes, they should be able to do it. You can request the change online. If your situation is like ours the website will inform you it will take a day to update on the website and you don't want to sell until you've confirmed the specific ID cost basis is correct.

Specific ID will let you select the lots that have the smallest long term capital gains. It will not let you avoid capital gains tax if all of the lots have capital gains. Maybe some have capital losses and you could select those to sell. You'll be able to see in the user interface the short and long term gains in each lot to inform which ones you sell.

HeelaMonster
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Re: Question on cost basis/capital gains in taxable acct

Post by HeelaMonster » Tue Nov 26, 2019 5:23 pm

On a related note, am I correct in my understanding that..... IF one intends to sell the ENTIRETY (100%) of the asset in question, in one single transaction.... then the method used to calculate cost basis becomes irrelevant? That is, the capital gains tax will be the same, regardless of method, because all shares are being sold together?

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Re: Question on cost basis/capital gains in taxable acct

Post by RickBoglehead » Tue Nov 26, 2019 5:28 pm

HeelaMonster wrote:
Tue Nov 26, 2019 5:23 pm
On a related note, am I correct in my understanding that..... IF one intends to sell the ENTIRETY (100%) of the asset in question, in one single transaction.... then the method used to calculate cost basis becomes irrelevant? That is, the capital gains tax will be the same, regardless of method, because all shares are being sold together?
Yes.
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Re: Question on cost basis/capital gains in taxable acct

Post by RubyTuesday » Tue Nov 26, 2019 5:50 pm

RickBoglehead wrote:
Tue Nov 26, 2019 5:28 pm
HeelaMonster wrote:
Tue Nov 26, 2019 5:23 pm
On a related note, am I correct in my understanding that..... IF one intends to sell the ENTIRETY (100%) of the asset in question, in one single transaction.... then the method used to calculate cost basis becomes irrelevant? That is, the capital gains tax will be the same, regardless of method, because all shares are being sold together?
Yes.
Is “yes” still accurate if some shares were held less than 12 months and some longer?

retired@50
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Re: Question on cost basis/capital gains in taxable acct

Post by retired@50 » Tue Nov 26, 2019 5:56 pm

RubyTuesday wrote:
Tue Nov 26, 2019 5:50 pm
RickBoglehead wrote:
Tue Nov 26, 2019 5:28 pm
HeelaMonster wrote:
Tue Nov 26, 2019 5:23 pm
On a related note, am I correct in my understanding that..... IF one intends to sell the ENTIRETY (100%) of the asset in question, in one single transaction.... then the method used to calculate cost basis becomes irrelevant? That is, the capital gains tax will be the same, regardless of method, because all shares are being sold together?
Yes.
Is “yes” still accurate if some shares were held less than 12 months and some longer?
Yes. IF you sell the entire position (100 %) then some will be taxed as long term capital gains, and some as short term capital gains. This would still be true even if you sell the entire position (100 %) by each of the individual lots.

Edit: The statement above is only accurate with regard to the total gain or loss, not what amount would be associated to long term or short term gain tax treatment. Thanks to Ruby Tuesday for catching my error.

Regards,
Last edited by retired@50 on Wed Nov 27, 2019 12:55 am, edited 1 time in total.
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RubyTuesday
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Re: Question on cost basis/capital gains in taxable acct

Post by RubyTuesday » Tue Nov 26, 2019 6:02 pm

retired@50 wrote:
Tue Nov 26, 2019 5:56 pm
RubyTuesday wrote:
Tue Nov 26, 2019 5:50 pm
RickBoglehead wrote:
Tue Nov 26, 2019 5:28 pm
HeelaMonster wrote:
Tue Nov 26, 2019 5:23 pm
On a related note, am I correct in my understanding that..... IF one intends to sell the ENTIRETY (100%) of the asset in question, in one single transaction.... then the method used to calculate cost basis becomes irrelevant? That is, the capital gains tax will be the same, regardless of method, because all shares are being sold together?
Yes.
Is “yes” still accurate if some shares were held less than 12 months and some longer?
Yes. IF you sell the entire position (100 %) then some will be taxed as long term capital gains, and some as short term capital gains. This would still be true even if you sell the entire position (100 %) by each of the individual lots.
Buy 100 shares 18 months ago at $40. Buy 100 shares 6 months ago at $50. Sale all today at $60.

Using average cost basis, you have 200 shares at cost basis of $45 each and you have a $1500 LTCG and a $1500 STCG.
Using Spec ID (or FIFO) you have 100 shares cost basis $40 each with LTCG of $2000 and 100 shares cost basis $50 each and $1000 STCG.

Unless I’m confused, which is certainly plausible.

FactualFran
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Re: Question on cost basis/capital gains in taxable acct

Post by FactualFran » Tue Nov 26, 2019 6:37 pm

RubyTuesday wrote:
Tue Nov 26, 2019 6:02 pm
Buy 100 shares 18 months ago at $40. Buy 100 shares 6 months ago at $50. Sale all today at $60.

Using average cost basis, you have 200 shares at cost basis of $45 each and you have a $1500 LTCG and a $1500 STCG.
Using Spec ID (or FIFO) you have 100 shares cost basis $40 each with LTCG of $2000 and 100 shares cost basis $50 each and $1000 STCG.

Unless I’m confused, which is certainly plausible.
You are not confused. When all shares are sold, the sum of the short-term and long-term gains is the same using average basis or Spec ID method. What differs when using different methods is how much of the total gain is short-term and how much is long-term.

the way
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Re: Question on cost basis/capital gains in taxable acct

Post by the way » Tue Nov 26, 2019 8:03 pm

FactualFran wrote:
Tue Nov 26, 2019 6:37 pm
RubyTuesday wrote:
Tue Nov 26, 2019 6:02 pm
Buy 100 shares 18 months ago at $40. Buy 100 shares 6 months ago at $50. Sale all today at $60.

Using average cost basis, you have 200 shares at cost basis of $45 each and you have a $1500 LTCG and a $1500 STCG.
Using Spec ID (or FIFO) you have 100 shares cost basis $40 each with LTCG of $2000 and 100 shares cost basis $50 each and $1000 STCG.

Unless I’m confused, which is certainly plausible.
You are not confused. When all shares are sold, the sum of the short-term and long-term gains is the same using average basis or Spec ID method. What differs when using different methods is how much of the total gain is short-term and how much is long-term.
Wow, you guys might have just found a huge loophole to convert long-term losses to short-term! Say you have $10k long-term losses that you want to realize. Instead of just selling all the shares, you could first double your shares by buying more. Then sell everything the next day and get 5k LTCL and 5k STCL. The more you buy, the more loss you can shift. I wonder if this really works.

retired@50
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Re: Question on cost basis/capital gains in taxable acct

Post by retired@50 » Tue Nov 26, 2019 8:11 pm

Point Ruby Tuesday!

Regards,
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the way
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Re: Question on cost basis/capital gains in taxable acct

Post by the way » Fri Dec 20, 2019 3:01 pm

the way wrote:
Tue Nov 26, 2019 8:03 pm
Wow, you guys might have just found a huge loophole to convert long-term losses to short-term! Say you have $10k long-term losses that you want to realize. Instead of just selling all the shares, you could first double your shares by buying more. Then sell everything the next day and get 5k LTCL and 5k STCL. The more you buy, the more loss you can shift. I wonder if this really works.
Was thinking about this again today. I guess it wouldn't work because of wash sale rules. I.e. with average basis, the shares are considered sold FIFO to determine holding period. So a wash sale would be triggered by the replacement shares, even if sold at the same time, which means they inherit the holding period of the replaced shares. You'd have to hold 31 days which kinda defeats the loophole.

ETA: oh but maybe if you bought and sold 2x more shares, then it does work again. The first 1x shares would trigger a wash sale and would inherit the long term holding, but the other 1x shares would be short term and could be used to offset short term gains.

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Re: Question on cost basis/capital gains in taxable acct

Post by grabiner » Sun Dec 22, 2019 1:50 am

the way wrote:
Tue Nov 26, 2019 8:03 pm
Wow, you guys might have just found a huge loophole to convert long-term losses to short-term! Say you have $10k long-term losses that you want to realize. Instead of just selling all the shares, you could first double your shares by buying more. Then sell everything the next day and get 5k LTCL and 5k STCL. The more you buy, the more loss you can shift. I wonder if this really works.
This won't work because the holding period for the replacement shares includes the holding period for the shares that were previously sold, precisely to avoid this issue. You wouldn't even need to double your shares: sell for a loss on December 23, buy replacement shares on December 24, sell those shares for a loss on December 26. But it won't work because your holding period for those replacement shares will be from the original purchase through December 23, plus two days.
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the way
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Re: Question on cost basis/capital gains in taxable acct

Post by the way » Tue Jan 14, 2020 1:46 pm

grabiner wrote:
Sun Dec 22, 2019 1:50 am
the way wrote:
Tue Nov 26, 2019 8:03 pm
Wow, you guys might have just found a huge loophole to convert long-term losses to short-term! Say you have $10k long-term losses that you want to realize. Instead of just selling all the shares, you could first double your shares by buying more. Then sell everything the next day and get 5k LTCL and 5k STCL. The more you buy, the more loss you can shift. I wonder if this really works.
This won't work because the holding period for the replacement shares includes the holding period for the shares that were previously sold, precisely to avoid this issue. You wouldn't even need to double your shares: sell for a loss on December 23, buy replacement shares on December 24, sell those shares for a loss on December 26. But it won't work because your holding period for those replacement shares will be from the original purchase through December 23, plus two days.
Double-check the post right above yours. Maybe if you bought 2x new shares, it would shift 1/3 of losses to short-term. If you bought 3x new shares, it'd be 50-50 long and short term?

You'd have to have both long and short term gains to offset for this to be helpful tho, not to mention plenty of cash to make the 1-day trade.

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