FIFO vs Avg Cost vs Specific ID

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
radstar
Posts: 45
Joined: Tue Mar 14, 2017 9:53 pm

FIFO vs Avg Cost vs Specific ID

Post by radstar » Tue Mar 24, 2020 10:32 am

Hi,

I'm thinking of converting my bonds (limited term tax-exempt and NY tax-exempt) into stocks at Vanguard (VTSAX, VTIAX). Obviously, I have to choose cost basis method since I never established it.

Is there an advantage in choosing one over other, especially in current environment? So far I have concluded that choosing specific ID would allow me to sell the "costliest" bonds that I bought, which will result in capital loss. But question is - is it better than FIFO and average cost?

Need some expert opinion please.

Thanks in advance. :sharebeer
"No one cares how much you know, until they know how much you care" - Anonymous

livesoft
Posts: 70073
Joined: Thu Mar 01, 2007 8:00 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by livesoft » Tue Mar 24, 2020 10:38 am

Always use Specific Identification nowadays if you can. That's the consensus answer. It gives one the most flexibility in choosing shares.

Average Cost forces FIFO, BTW. That is, if you use Average Cost, then the shares you sell are the first shares in.

Specific Identification also uses FIFO by default. That is, if you set cost basis method to Specific Identification, but don't actually identify the shares you sold, then the IRS says that you used the First (i.e. oldest still held) shares purchased.

Thus, FIFO is a joke and you don't want to use it. It is a way of identifying shares and not a cost basis method.

My personal opinion is that Average Cost should be illegal. It cannot apply to stocks anyways. As fiduciaries, brokerages should just get rid of that cost basis method and so should the IRS.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
Topic Author
radstar
Posts: 45
Joined: Tue Mar 14, 2017 9:53 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by radstar » Wed Mar 25, 2020 10:30 am

Thanks for the reply.

Vanguard also has "Highest In, First Out" option, which I didn't know. If I were to sell the costliest bond by using Specific ID method, wouldn't that be same as "HIFO"? :confused
"No one cares how much you know, until they know how much you care" - Anonymous

HomeStretch
Posts: 3949
Joined: Thu Dec 27, 2018 3:06 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by HomeStretch » Wed Mar 25, 2020 10:49 am

radstar wrote:
Wed Mar 25, 2020 10:30 am
Vanguard also has "Highest In, First Out" option, which I didn't know. If I were to sell the costliest bond by using Specific ID method, wouldn't that be same as "HIFO"? :confused
Yes, in this case. But you likely would want “Lowest In, First Out” if in the future you were donating shares to a DAF or tax gain harvesting. Using “Specific ID” as the default basis method in a Taxable account is the best option IMO. Some brokers, like Fidelity, allow you to “sort” tax lots in various manners when you go to sell which is helpful if only selling a portion of a holding to quickly identify and select the lots to sell.

livesoft
Posts: 70073
Joined: Thu Mar 01, 2007 8:00 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by livesoft » Wed Mar 25, 2020 10:53 am

radstar wrote:
Wed Mar 25, 2020 10:30 am
Vanguard also has "Highest In, First Out" option, which I didn't know. If I were to sell the costliest bond by using Specific ID method, wouldn't that be same as "HIFO"? :confused
FIFO, HIFO, LIFO, and anything that is not specifically listed as Specific Identification or Average Cost is simply Specific Identification in disguise with computer software making the specific identification for you.
Wiki This signature message sponsored by sscritic: Learn to fish.

TIAX
Posts: 1294
Joined: Sat Jan 11, 2014 12:19 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by TIAX » Wed Mar 25, 2020 10:57 am

HomeStretch wrote:
Wed Mar 25, 2020 10:49 am
radstar wrote:
Wed Mar 25, 2020 10:30 am
Vanguard also has "Highest In, First Out" option, which I didn't know. If I were to sell the costliest bond by using Specific ID method, wouldn't that be same as "HIFO"? :confused
Yes, in this case. But you likely would want “Lowest In, First Out” if in the future you were donating shares to a DAF or tax gain harvesting. Using “Specific ID” as the default basis method in a Taxable account is the best option IMO. Some brokers, like Fidelity, allow you to “sort” tax lots in various manners when you go to sell which is helpful if only selling a portion of a holding to quickly identify and select the lots to sell.
Vanguard also lets you sort tax lots when selling or exchanging.

User avatar
Topic Author
radstar
Posts: 45
Joined: Tue Mar 14, 2017 9:53 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by radstar » Wed Mar 25, 2020 11:18 am

HomeStretch wrote:
Wed Mar 25, 2020 10:49 am
radstar wrote:
Wed Mar 25, 2020 10:30 am
Vanguard also has "Highest In, First Out" option, which I didn't know. If I were to sell the costliest bond by using Specific ID method, wouldn't that be same as "HIFO"? :confused
Yes, in this case. But you likely would want “Lowest In, First Out” if in the future you were donating shares to a DAF or tax gain harvesting. Using “Specific ID” as the default basis method in a Taxable account is the best option IMO. Some brokers, like Fidelity, allow you to “sort” tax lots in various manners when you go to sell which is helpful if only selling a portion of a holding to quickly identify and select the lots to sell.
Could you please explain which one is better between HIFO and LIFO, especially for current environment? I'm in higher tax bracket and would like to minimize that if possible by harvesting.

Thanks.
"No one cares how much you know, until they know how much you care" - Anonymous

livesoft
Posts: 70073
Joined: Thu Mar 01, 2007 8:00 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by livesoft » Wed Mar 25, 2020 11:26 am

Neither is better.

Use Specific Identification and use your own brain. The reason is that sometimes you may wish to use a mixture of HIFO, FIFO, and LIFO and not a single computer-chosen choice. Why? Maybe you want to clean up small-lots from dividend reinvesting? Maybe you want to clear out something that might create a future wash sale? Maybe you want the biggest tax-loss possible? Maybe you want the lowest gain possible?
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
grabiner
Advisory Board
Posts: 26063
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: FIFO vs Avg Cost vs Specific ID

Post by grabiner » Wed Mar 25, 2020 12:36 pm

radstar wrote:
Wed Mar 25, 2020 11:18 am
Could you please explain which one is better between HIFO and LIFO, especially for current environment? I'm in higher tax bracket and would like to minimize that if possible by harvesting.
Usually, you want to use HIFO; the highest shares are those with the smallest capital gain or largest loss. (This assumes that you are actually selling shares; if you donate to charity, you want to donate the lowest-basis shares with a long-term gain.)

The main exception to HIFO applies when you have the choice between short-term and long-term gains. If you don't have enough carryovers to offset the gain, you would prefer to take a long-term gain of $3000 than a short-term gain of $2000, particularly since taking the long-term gain reduces your future gains by $1000.

The only situation I can see in which LIFO is preferable to HIFO is when you need to sell your most recently purchased lot for a capital gain in order to avoid a wash sale. But in this situation, if you sell your highest-basis shares, the wash sale will then increase the basis of your recently-purchased shares so that you want to sell them for a capital loss as well.

Setting HIFO as the default, and overriding it when necessary, should work well.
Wiki David Grabiner

HomeStretch
Posts: 3949
Joined: Thu Dec 27, 2018 3:06 pm

Re: FIFO vs Avg Cost vs Specific ID

Post by HomeStretch » Wed Mar 25, 2020 1:21 pm

radstar wrote:
Wed Mar 25, 2020 11:18 am
HomeStretch wrote:
Wed Mar 25, 2020 10:49 am
radstar wrote:
Wed Mar 25, 2020 10:30 am
Vanguard also has "Highest In, First Out" option, which I didn't know. If I were to sell the costliest bond by using Specific ID method, wouldn't that be same as "HIFO"? :confused
Yes, in this case. But you likely would want “Lowest In, First Out” if in the future you were donating shares to a DAF or tax gain harvesting. Using “Specific ID” as the default basis method in a Taxable account is the best option IMO. Some brokers, like Fidelity, allow you to “sort” tax lots in various manners when you go to sell which is helpful if only selling a portion of a holding to quickly identify and select the lots to sell.
Could you please explain which one is better between HIFO and LIFO, especially for current environment? I'm in higher tax bracket and would like to minimize that if possible by harvesting.

Thanks.
Use Specific ID and select the lots you want to sell. You can use the sort/select feature (at Fidelity/Vanguard) when selecting lots to sell that can sort highest or lowest basis first depending on why you are selling. In the end as livesoft pointed out, they are all a form of specific identification.

User avatar
Wiggums
Posts: 2851
Joined: Thu Jan 31, 2019 8:02 am

Re: FIFO vs Avg Cost vs Specific ID

Post by Wiggums » Wed Mar 25, 2020 1:44 pm

grabiner wrote:
Wed Mar 25, 2020 12:36 pm
radstar wrote:
Wed Mar 25, 2020 11:18 am
Could you please explain which one is better between HIFO and LIFO, especially for current environment? I'm in higher tax bracket and would like to minimize that if possible by harvesting.
Usually, you want to use HIFO; the highest shares are those with the smallest capital gain or largest loss. (This assumes that you are actually selling shares; if you donate to charity, you want to donate the lowest-basis shares with a long-term gain.)

The main exception to HIFO applies when you have the choice between short-term and long-term gains. If you don't have enough carryovers to offset the gain, you would prefer to take a long-term gain of $3000 than a short-term gain of $2000, particularly since taking the long-term gain reduces your future gains by $1000.

The only situation I can see in which LIFO is preferable to HIFO is when you need to sell your most recently purchased lot for a capital gain in order to avoid a wash sale. But in this situation, if you sell your highest-basis shares, the wash sale will then increase the basis of your recently-purchased shares so that you want to sell them for a capital loss as well.

Setting HIFO as the default, and overriding it when necessary, should work well.
This explanation was very helpful. Thank you.

Post Reply