Cost Basis Question

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ljez
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Joined: Sat Oct 25, 2008 9:03 pm

Cost Basis Question

Post by ljez » Fri May 22, 2020 9:07 am

I was hoping you could help me understand the consequences of changing cost basis on my VTSMX taxable account. I have read the wiki but not sure I am understanding it. Here is my situation

Purchased initial lot of VTSMX in 2004. Each month I purchased a set amount.

In 2011 I needed to sell 1/3 of the shares to cover some expenses. I hadn't done anything with the account so I sold and reported on my taxes as average cost.

I went back to purchasing more shares each month in 2012 and have so ever since.

I am not planning on selling anytime soon....but thought I should change to Spec ID. I went online and it allowed me to this week.

My question is how to report future sales.

In the future when I sell do I use Average cost for those shares left/purchased between 2004 and 2011 when I sold? Then those shares purchased after the sale in 2011 use Spec ID?

Or do I have to use Average cost for those shares left/purchased from 2004 through 5/2020 when I made the change to the account and then Spec ID going forward?

I guess the question is, when does the change take effect? When you make the change, or making the change does it go back to/if you made the last sale? Hoping this makes sense.

livesoft
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Re: Cost Basis Question

Post by livesoft » Fri May 22, 2020 9:10 am

I guess this is with Vanguard. When the change takes affect, I think you will see what is what and that will answer all your questions. Be patient, then take a look at your account cost basis lots.
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retired@50
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Re: Cost Basis Question

Post by retired@50 » Fri May 22, 2020 9:19 am

As I understand it, there was a change in the law in 2012 for mutual funds. The cost basis tracking was always up to the shareholder, but Congress started to require that financial custodians like Vanguard and Fidelity do the tracking for people. More accurate, etc.

So, I too have shares that are "old" and "new(er)". I use Spec-Id. However, for any shares that are old (also known as "non-covered") the only data available at Vanguard is average cost. So, every share sold from the old batch leads to the same capital gain or loss. If I choose to sell shares from the "new" batch, (also known as "covered shares") then each lot has its own gain or loss value.

So when you go forward now, to sell, you should see a detailed list of every lot purchased since 2012, plus one "big" lot that consists of all shares purchased before 2012. Those shares will all share the same cost basis of average cost. When you sell, the share transactions will be reported to the IRS using the covered or non-covered distinction.

Regards,
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Stinky
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Re: Cost Basis Question

Post by Stinky » Fri May 22, 2020 4:11 pm

retired@50 wrote:
Fri May 22, 2020 9:19 am
So when you go forward now, to sell, you should see a detailed list of every lot purchased since 2012, plus one "big" lot that consists of all shares purchased before 2012. Those shares will all share the same cost basis of average cost. When you sell, the share transactions will be reported to the IRS using the covered or non-covered distinction.
OP, normal BH practice is to sell shares with the highest cost basis. This will maximize tax losses / minimize tax gains.

If you’ve been buying shares since 2012, I expect that those shares you’ve bought since then will have a higher basis than those purchased earlier. So I expect that you’ll be selling most all of your “spec-ID” shares before you start selling average cost shares.
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Toons
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Re: Cost Basis Question

Post by Toons » Fri May 22, 2020 4:19 pm

I have always used average basis
Just easier for me.
I guess I have missed some tax reduction opportunities,
but then again I rarely sell fund shares.
In hindsight I wouldn't change anything(40 years)
Everyone uses the strategy that fits their needs
:happy
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