Think I made an enormous mistake

[Wilderness Librarian]

On Vanguard's new brokerage platform sold some shares and newbe to brokerage (I resisted transfer as long as I could) some shares I have to self report. Being nieve clicked average cost share on the options.This probably messes up tax reporting. Is there a way to sort this stuff out? Or am I simply going to be in big trouble?

[pizzy]

Nobody can answer your question without details.

[mhalley]

I’m not sure this is the question you are asking, but for future transaction, I believe you can change your cost basis at any time. But since you sold shares, you need to do it in writing. But I think you are locked in for the completed transaction.

https://investor.vanguard.com/investor- ... ort%2Dterm.

Average cost basis: You must elect out of or into this method in writing. Upon the sale, transfer, or disposition of covered shares, you’ll be locked into the average cost method until you change it in writing. This may make certain tax planning, such as gifting or charitable giving, less advantageous. In limited circumstances, long-term gains or losses may be converted to short-term.

[Wilderness Librarian]

If I am locked in and it is wrong for tax filing for this kind of sale, what do I do?

[secondcor521]

If I am locked in and it is wrong for tax filing for this kind of sale, what do I do?

Nothing now; it's too late. The IRS requires you to identify shares to the broker (Vanguard in this case) prior to the sale transaction, so what you've sold is already locked in now. (In addition, Vanguard won't let you change a sell transaction once it's submitted anyway.)

Also, you're not in any sort of trouble. At worst, it could be somewhat harder to do your taxes next spring and you might have to pay some more in taxes than what might have been optimal. But frankly the IRS is a little happy when you pay them more money, so they're not going to be mad at you for that.

There is no "wrong" basis method for tax filing. There are just different basis methods and different share lots that have different tax implications. It's better if you know what you're doing before hand and make a plan, but in most cases it's not the end of the world if you pick the wrong method or the wrong share lot. Again, you'll just pay more in taxes than you otherwise would, which might motivate you to be better prepared next time.

[celia]

When you do your taxes next spring, you'll enter the cost basis on from the tax statement you'll receive. (The IRS wants you to acknowledge what is on the tax statement so you both match.) Then you'll override the cost basis to whatever some of your shares had. Both cost basis amounts will be reflected on the tax return but taxes will be calculated using the override.

The hard part is documenting what you are doing now so that you can maintain the correct remaining cost basis for future sales. Where will you put this info so you can find it when you sell more shares in the future?

[Northern Flicker]

On Vanguard's new brokerage platform sold some shares and newbe to brokerage (I resisted transfer as long as I could) some shares I have to self report. Being nieve clicked average cost share on the options.This probably messes up tax reporting. Is there a way to sort this stuff out? Or am I simply going to be in big trouble?

It shouldn't mess up your tax reporting. You should get a 1099 showing the average cost basis and proceeds of the sale. If these shares were acquired after 1/1/2012, they are called covered shares, and Vanguard must include this info on the 1099. If acquired before that, Vanguard should include the basis on the 1099 as long as they have it.

You do need to check the 1099 for accuracy.

[nps]

When you do your taxes next spring, you'll enter the cost basis on the tax statement you'll receive. (The IRS wants you to acknowledge what is on the tax statement so you both match.) Then you'll override the cost basis to whatever some of your shares had. Both cost basis amounts will be reflected on the tax return but taxes will be calculated using the override.

The hard part is documenting what you are doing now so that you can maintain the correct remaining cost basis for future sales. Where will you put this info so you can find it when you sell more shares in the future?

Where are you getting this information? I don't think it's possible to override what the broker reports. See for example here:

"But the bottom line is that under the new rules, making a proper cost basis method of accounting decision is important, because it will be tracked and reported to the IRS, and cannot be changed after the fact."

[toddthebod]

On Vanguard's new brokerage platform sold some shares and newbe to brokerage (I resisted transfer as long as I could) some shares I have to self report. Being nieve clicked average cost share on the options.This probably messes up tax reporting. Is there a way to sort this stuff out? Or am I simply going to be in big trouble?

It might not be too late. You need to get on the phone with Vanguard today, and ask them to sell specific lots. And by today, I mean today, before the trade has settled.

[celia]

When you do your taxes next spring, you'll enter the cost basis on from the tax statement you'll receive. (The IRS wants you to acknowledge what is on the tax statement so you both match.) Then you'll override the cost basis to whatever some of your shares had. Both cost basis amounts will be reflected on the tax return but taxes will be calculated using the override.

The hard part is documenting what you are doing now so that you can maintain the correct remaining cost basis for future sales. Where will you put this info so you can find it when you sell more shares in the future?

Where are you getting this information? I don't think it's possible to override what the broker reports. See for example here:

"But the bottom line is that under the new rules, making a proper cost basis method of accounting decision is important, because it will be tracked and reported to the IRS, and cannot be changed after the fact."

That is an old post from 2012, when brokerages had to start reporting the cost basis on your tax statement. In those early years there were lots of cost basIs reporting errors by the brokerage houses. But, the tax software I use allows the override (H&R Block and Turbotax). The taxpayer is responsible for reporting the correct cost basis. It is best to save a copy of the purchase statement with your copy of the tax return to prove your correction is right.

[BlizzardPearl]

When you do your taxes next spring, you'll enter the cost basis on the tax statement you'll receive. (The IRS wants you to acknowledge what is on the tax statement so you both match.) Then you'll override the cost basis to whatever some of your shares had. Both cost basis amounts will be reflected on the tax return but taxes will be calculated using the override.

The hard part is documenting what you are doing now so that you can maintain the correct remaining cost basis for future sales. Where will you put this info so you can find it when you sell more shares in the future?

Where are you getting this information? I don't think it's possible to override what the broker reports. See for example here:

"But the bottom line is that under the new rules, making a proper cost basis method of accounting decision is important, because it will be tracked and reported to the IRS, and cannot be changed after the fact."

That is an old post from 2012, when brokerages had to start reporting the cost basis on your tax statement. In those early years there were lots of cost basIs reporting problems. But since then, the tax software I use allows the override (H&R Block and Turbotax). The taxpayer is responsible for reporting the correct cost basis.

Whatever software you use, & even if you use a professional preparer, here are the specifics you should look for on the completed return to check its accuracy.

For a sale of non-covered securities and the basis is incorrect, you should see an entry on Form 8949 with the *actual* cost basis in Col (e), code “B” in Col (f), 0 in Col (g), and the actual gain/loss in Col (h).

For a sale of covered securities and the basis is incorrect, you should see an entry on form 8949 with the 1099B *reported* cost basis in Col (e), code “B” in Col (f), the amount of gain/loss adjustment in Col (g), and the actual gain/loss in Col (h). The amount in Col (g) is the difference between the reported basis (as shown on the 1099B) and the actual basis (as computed under specific ID). The adjustment is negative if the actual cost basis is greater than the report cost basis, and positive vice-versa.

[rkhusky]

Essentially what Vanguard will do is to make the cost basis (price you paid) for all your shares in that fund the same, ie the average cost. And I believe this is an IRS rule, so when Vanguard reports this, I am not sure you can call it a mistake. And even if you are allowed to make the change, will it be worth it to make corrections every year until all your shares are sold?

One way to correct the matter is to sell all your remaining shares and start over, but that could be costly too (and you may need to wait a month before getting back into the fund).

If you really want actual cost instead of average cost, the best thing is to see if Vanguard will reverse the sale. But if not, you will have some deciding to do.

[Wilderness Librarian]

On Vanguard's new brokerage platform sold some shares and newbe to brokerage (I resisted transfer as long as I could) some shares I have to self report. Being nieve clicked average cost share on the options.This probably messes up tax reporting. Is there a way to sort this stuff out? Or am I simply going to be in big trouble?

It might not be too late. You need to get on the phone with Vanguard today, and ask them to sell specific lots. And by today, I mean today, before the trade has settled.

How do I tell them to sell specific lots when what I have are the annual reports from tax years?

[LotsaGray]

On Vanguard's new brokerage platform sold some shares and newbe to brokerage (I resisted transfer as long as I could) some shares I have to self report. Being nieve clicked average cost share on the options.This probably messes up tax reporting. Is there a way to sort this stuff out? Or am I simply going to be in big trouble?

Basically if you can’t get VG to change to spec I’d you are now locked into using average basis for all the remaining shares of this security you still own with VG. There is no way I know of to change this after the fact.

It is not really a mistake. Just a different way for handling taxes. Average cost basis is generally less tax efficient but not a huge error.

Biggest issue it it locks you in for the balance of the shares you hold. You can always change from spec id to average basis but once you do a sale on average basis you can’t go back to spec id

[Wilderness Librarian]

These were bought under mutual fund I have no record of the lots.

What do I do for future sales which I will need to make?

[Uniballer]

How do I tell them to sell specific lots when what I have are the annual reports from tax years?

if you have purchase dates and share quantities then you can reconstruct cost basis. Don't forget to add in reinvested dividends, if any.

I helped my parents to sell all of their non-covered shares of some terrible mutual funds that had been sold to them by various brokers. I did have purchase dates and share quantities from old statements, but not the share prices. Yahoo finance etc. helped me reconstruct daily share prices and reinvested dividends to document that all of those funds were sold at a loss. Their accountant took my word (spreadsheet) for it, and they haven't been audited...

[Wilderness Librarian]

Also I will need to take RMD from an inherited IRA. All I have are the mutual fund annuals.

[toddthebod]

When you do your taxes next spring, you'll enter the cost basis on from the tax statement you'll receive. (The IRS wants you to acknowledge what is on the tax statement so you both match.) Then you'll override the cost basis to whatever some of your shares had. Both cost basis amounts will be reflected on the tax return but taxes will be calculated using the override.

The hard part is documenting what you are doing now so that you can maintain the correct remaining cost basis for future sales. Where will you put this info so you can find it when you sell more shares in the future?

Where are you getting this information? I don't think it's possible to override what the broker reports. See for example here:

"But the bottom line is that under the new rules, making a proper cost basis method of accounting decision is important, because it will be tracked and reported to the IRS, and cannot be changed after the fact."

That is an old post from 2012, when brokerages had to start reporting the cost basis on your tax statement. In those early years there were lots of cost basIs reporting errors by the brokerage houses. But, the tax software I use allows the override (H&R Block and Turbotax). The taxpayer is responsible for reporting the correct cost basis. It is best to save a copy of the purchase statement with your copy of the tax return to prove your correction is right.

I do not believe the taxpayer can override the broker:

26 CFR § 1.1012-1

(i) If a taxpayer places shares of stock described in paragraph (e)(1)(i) of this section acquired on or after January 1, 2012, in the custody of a broker (as defined by section 6045(c)(1)), including by transfer from an account with another broker, the basis of the shares is determined in accordance with the broker's default method, unless the taxpayer notifies the broker that the taxpayer elects another permitted method. The taxpayer must report gain or loss using the method the taxpayer elects or, if the taxpayer fails to make an election, the broker's default method. See paragraphs (e)(9)(i) and (e)(9)(v), Example 2, of this section.

If you do not notify the broker that you have elected a different method, you must report gain or loss using the broker's default method.

There are also illustrative examples later in the regulation that explicitly demonstrate that your basis is the broker's default method unless you notify them otherwise.

The requirement to notify the broker is a topic that comes up over and over and over again in the examples.

[celia]

OP, If you're trying to report that you sold the shares with the highest cost basis (ie, lowest gain), are you prepared to sell the remaining shares someday with a smaller cost basis (ie, larger gain than using the average cost basis)?

For example, if you bought 1000 shares at different times for $30, $55, and $92 a share and reinvested dividends as 20 or 30 more shares a year, if the average cost basis of all shares is $70, if you sold 1000 shares and claim the cost basis is $92, then future shares must also be sold at the original cost basis price, not for a $70 average cost basis.

How will you remember that when the future tax statement shows the average cost basis of $70?

[celia]

Also I will need to take RMD from an inherited IRA. All I have are the mutual fund annuals.

That's easy since IRAs are a different animal. They don't have capital gains/ losses. (But some custodians display the accounts just like Taxable accounts.)

Instead, every dollar withdrawn is taxed as normal income (like wages).

[Wilderness Librarian]

On Vanguard's new brokerage platform sold some shares and newbe to brokerage (I resisted transfer as long as I could) some shares I have to self report. Being nieve clicked average cost share on the options.This probably messes up tax reporting. Is there a way to sort this stuff out? Or am I simply going to be in big trouble?

It shouldn't mess up your tax reporting. You should get a 1099 showing the average cost basis and proceeds of the sale. If these shares were acquired after 1/1/2012, they are called covered shares, and Vanguard must include this info on the 1099. If acquired before that, Vanguard should include the basis on the 1099 as long as they have it.

You do need to check the 1099 for accuracy.

I dont think they do have the cost basis nor do I really. That is part of the problem

[twh]

These were bought under mutual fund I have no record of the lots.

What do I do for future sales which I will need to make?

I don't think you've made any mistakes.

If you have no records of the lots then, unless you are able to research the lots, there is nothing else can you do except average cost basis. Hopefully you have that? If not, you have a bigger problem figuring that out.

As at least one poster said, for sales where the brokerage doesn't have the cost basis information, it will be listed on the 1099 with an unknown cost basis and you enter it on Schedule D yourself from your own personal records. So, it's all up to you anyway.

When you figure out the average costs basis, you should be able to go into your account and manually update the cost basis and that will make life just a bit easier the next time.

[evancox10]

On Vanguard's new brokerage platform sold some shares and newbe to brokerage (I resisted transfer as long as I could) some shares I have to self report. Being nieve clicked average cost share on the options.This probably messes up tax reporting. Is there a way to sort this stuff out? Or am I simply going to be in big trouble?

It shouldn't mess up your tax reporting. You should get a 1099 showing the average cost basis and proceeds of the sale. If these shares were acquired after 1/1/2012, they are called covered shares, and Vanguard must include this info on the 1099. If acquired before that, Vanguard should include the basis on the 1099 as long as they have it.

You do need to check the 1099 for accuracy.

I dont think they do have the cost basis nor do I really. That is part of the problem

If neither Vanguard nor you know the cost basis for each lot, how would you even do spec ID? Do you know if these are covered shares or not? (When were they purchased?)

And, are you planning to continue to accumulate money and purchase shares in this mutual fund in the future, or are you are just going to sell shares in the future?

[Wilderness Librarian]

Just going to sell shares in the future. If I don't really have any cost basis for uncovered shares does this mean those shares are unsellable? and how do I fill out forms?

Realize now I should have liquidated mutual funds before transfering to brokerage but this would have resulted in big cap gains.

[Katietsu]

Just going to sell shares in the future. If I don't really have any cost basis for uncovered shares does this mean those shares are unsellable? and how do I fill out forms?

Realize now I should have liquidated mutual funds before transfering to brokerage but this would have resulted in big cap gains.

I can not understand how it would make a difference if you sold before or after the transfer to a brokerage account. Nothing is unsellable now or in the future. Actually, did Vanguard mutual fund accounts even allow any option other than average cost?

When did you sell the most recent shares? Have you sold shares of this mutual fund previously while the were in the Vanguard mutual fund side of things? Do you know when they were bought? Do you do automatic dividend reinvesting?

Answer as many of these questions as you can. I am not sure that you have done anything wrong.

In 2018, you wrote: “ I am now 66. I expect that as I age I may have more difficulty with passwords, security control situations small buttons, confusing screens & uncertain operational sequences. I do not think this perspective gets aired enough. I am already in the situation that I want to do less not more with computer systems and mobile devices.”. Over the last few months, you have posted about issues such as difficult navigating credit freezes and credit monitoring sign ups as well as your current concerns with respect to selling your stock.

Is it possible that this would be a good time to bring in a family member or a professional to work with you on some of these financial, administrative and technical tasks? Better to to put something in place before you truly need it.

[typical.investor]

Just going to sell shares in the future. If I don't really have any cost basis for uncovered shares does this mean those shares are unsellable? and how do I fill out forms?

Realize now I should have liquidated mutual funds before transfering to brokerage but this would have resulted in big cap gains.

Every broker has a way to get cost basis for uncovered shares into their system.

They won’t report it to the IRS and that is up to you.

Once I entered uncovered cost basis into my broker (Schwab), I was able to just import the 1099 into TurboTax and the transactions were reported (using my entered cost basis but in the section not-reported to the IRS). That means that Schwab was not reporting them to the IRS and only I on my tax return was. As such, I kept my records for why I had calculated cost basis the way I had.

Schwab has a tool (you have to be logged in) that helps in figuring it out. If you know purchases dates, sale dates, and if you have dividends reinvested, you can figure it out. If you know the number of shares you have now, and about when it was purchased, you have figure it out via trial and error to calculate a purchase date. Tools are useful because sometime a fund will issue a ginormous capital gain (25% of the fund) as it repositions which raises your cost basis. It won't be perfect but I'd prefer to walk into an audit with a reasonable, good-faith attempt instead of writing down cost basis to zero. Anyway, it's your responsibility to track it.

And if your broker won’t let you do that, then you will have to enter any sale info manually on your return.

[twh]

Just going to sell shares in the future. If I don't really have any cost basis for uncovered shares does this mean those shares are unsellable? and how do I fill out forms?

Realize now I should have liquidated mutual funds before transfering to brokerage but this would have resulted in big cap gains.

So, here's the thing. If you don't know how much you bought it for, you can't know how much tax to pay when you sell it. You say "I should have liquidated [at the previous institution]". But, that institution would/should have passed the basis (that's what you paid for it) to the new broker, *IF* it knew the basis. I've got some really old holdings that were brought before brokerages were required to keep track of the basis or stock that was purchased from the issuing company and then deposited into the broker and all of these I had to manually input the basis or the brokerage has no idea what I paid for it. My mother has some stuff, not amounting to all that much, that came to her decades ages ago and has no known basis and I just put it in a separate account at the broker. This will eventually be part of her estate and that will fix that problem. It isn't worth my time to try to go through boxes of statements and whatever else might be around to figure this out.

So, if this is a large amount, it is worth your time to try and track down the purchase dates and prices.

[BogleTaxPro]

Just going to sell shares in the future. If I don't really have any cost basis for uncovered shares does this mean those shares are unsellable? and how do I fill out forms?

Realize now I should have liquidated mutual funds before transfering to brokerage but this would have resulted in big cap gains.

Firstly, you actually probably did the right thing by not selling the mutual funds before you did the transfer. This way, YOU are controlling how much capital gains you are getting.

It sounds like these are Vanguard funds that you bought and held at Vanguard over the years. And just recently transferred them to the brokerage account at Vanguard's nagging. Yes? If so, then Vanguard of course knows the cost basis of the shares. That basis did NOT change just because you transferred them to a brokerage account. Vanguard just doesn't have to legally report the basis to the IRS for anything that you purchased before January 1, 2016. That's what the non-covered part of this discussion means.

When you get your 1099-B (actually a 1099-consolidated, which will cover the B, DIV, and INT forms for brokerage accounts) next spring, Vanguard should list the cost basis in the form even though it will be coded as 'not reported to the IRS'. You can just use that and not worry about all this 'spec id' vs 'average cost basis' stuff.

Note though...if you did the transfer this year (2023) and had any dividends or sales or interest in those funds BEFORE the transfer, you'll get a separate set of 1099 forms for that activity. Be sure you wait for both sets of forms before you do your taxes.

[Northern Flicker]

Just going to sell shares in the future. If I don't really have any cost basis for uncovered shares does this mean those shares are unsellable? and how do I fill out forms?

Realize now I should have liquidated mutual funds before transfering to brokerage but this would have resulted in big cap gains.

If you have non-covered shares, Vanguard should report the basis for a sale if they have it. If they don't, you need statements from the purchases of the shares. Log in and look at unrealized capital gains for the asset. If they have the basis, it should be displayed. You also can view or modify the basis method for future transactions there. If you look at the realized gains, you can see what gains were generated by your previous transaction as well.

[CFM300]

Every broker has a way to get cost basis for uncovered shares into their system.

Does Vanguard?

[Northern Flicker]

Yes. I believe you can edit the basis data.

[cchrissyy]

i don't think you made an enormous mistake

i think you might have clicked something you didn't mean to, and that it may or may not have mattered.

there's nothing you've said so far that makes it sound like a bad choice. of course, you haven't given any of the relevant numbers. i'm not sure if you have them.

also, the move from mutual fund platform to brokerage platform is not a problem here and doesn't have anything to do with the timing for what you "should" have done.

[sycamore]

... Actually, did Vanguard mutual fund accounts even allow any option other than average cost? ...

Yes, as did other mutual fund-only account providers like T. Rowe Price, Invesco, etc.

I don't have such accounts any longer but I imagine you still can elect a cost basis different than average cost.

[twh]

Getting the basis into the system isn't the hard part -- they all have a way to get that done. The hard part is doing the legwork to get the basis in the first place.

[celia]

Just going to sell shares in the future. If I don't really have any cost basis for uncovered shares does this mean those shares are unsellable? and how do I fill out forms?

If you can't find a cost basis, the cost basis will be zero. That means every share sold will be all gains and will be taxed as such. Better to have someone assist you in researching the cost basis but you would still have to know the date the shares were purchased. If the shares were purchased at Vanguard, ask them to research the cost basis for you since they still have your purchase information.

Realize now I should have liquidated mutual funds before transfering to brokerage but this would have resulted in big cap gains.

The gains would be the same whether you sold in a mutual fund account or a brokerage account.

If you don't need these shares for living expenses, just leave them alone and let the cost basis reset to the then-current value when you die. Then your heirs can sell them without paying much taxes on gains.

[rkhusky]

For uncovered shares that Vanguard has basis for, they will provide you with average cost basis on the 1099.

For covered shared, Vanguard will provide you actual cost if you sold under actual cost, or average cost if you sold under average cost.

Perhaps you transferred shares to Vanguard from a different brokerage and the other brokerage did not send the cost basis information and you have no records of your own. Therefore, if neither you nor Vanguard has cost basis information, you will use $0 for cost and pay tax on the entire sale.

The above is only for taxable accounts. Tax advantaged accounts like IRA’s are taxed differently and you don’t need cost basis.

[typical.investor]

Every broker has a way to get cost basis for uncovered shares into their system.

Does Vanguard?

I assume so. I don't know if this is recent but

https://personal.vanguard.com/us/litful ... s?cat=MAFM

shows:

Cost Basis Update Noncovered Shares Form Use this form to provide missing cost basis information for noncovered shares in a nonretirement account.

I changed my telephone number and can't get 2fa to log in anymore to check (you have to be logged in to access it). Transferred out 10 years ago...

[CFM300]

https://personal.vanguard.com/us/litful ... s?cat=MAFM

shows:

Cost Basis Update Noncovered Shares Form
Use this form to provide missing cost basis information for noncovered shares in a nonretirement account.

Thanks! The link didn't work even when I was logged in to my account, but I was able to find the form by searching the Vanguard site.