When is it necessary to choose an accounting method for a CD, Treasury or Bond in a Vanguard Taxable Brokerage Account?

[water2357]

Please see my second post below, I edited the subject to change focus to the question(s) in the second post and later.


Please ignore this first post.

The original subject was Vanguard cost basis and accounting (method) choices for CDs, Treasuries, Bonds

In a Vanguard taxable brokerage account a default cost basis method is assigned as FIFO for CDs, and apparently other fixed income securities, like Treasuries, Bonds, Etc.

1) Is is true that I can change the cost basis method for each individual security at any time before a sale of that security on the secondary market, and e.g. each CD could have a different cost basis method? Likewise each Treasury Note, each corporate bond, etc? These would all be (covered) securities for which Vanguard must report cost basis to the IRS.

2) Assuming that any CDs were purchased on the primary market as new issues and held to maturity, does it matter what the cost basis is at the time of maturity? And for such a CD would Schedule D reporting basically mean reporting the issue date, the issue amount x, the maturity date, the maturity amount (same as issue) of x and $0 gain/loss?

3) Vanguard mentions choosing an accounting method for bonds. Does this apply to CDs or Treasuries purchased on the primary market as new issues and held to maturity? Some new issue Treasuries at least at one time were sold at something other than par and could have accrued interest, if this is still true, then would a Treasury purchase require more than a cost basis method election?

4) Trying to understand when you need to make accounting method elections at Vanguard. Is this dependent on e.g.1) the particular fixed income secutity, 2) the market it was purchased through primary or secondary, 3) the market it was sold on (seconday) or if it simply matured, etc.

Looking for pitfalls, complications, necessary actions before actually attempting to purchase (primary or secondary) or sell (on the secondary market) primarily CDs or Treasuries through Vanguard.

Edit: I am also trying to make my way through the thread on Treasury securities tax implications here
viewtopic.php?t=390405
However, I'm hoping someone will be able to provide some insight on some of the basic questions I have above about what Vanguard requires on Cost Basis Method and Accounting Method for CDs, Treasuries, etc.

[water2357]

[Thread merged into here --admin LadyGeek]

Here is a link to the Vanguard webpage describing their Cost Basis Method choices.

https://investor.vanguard.com/investor- ... t-vanguard

At the bottom of the page is a note about choosing an accounting method for bonds. When/why is this needed and does this apply to other fixed income securities like CDs and Treasuries? And if so, how?

A special note about bonds

We offer four accounting methods:

Amortize bond premium.
Include accrued market discount.
Accrue market discount based on a ratable (straight-line) method.
Translate interest income and expense at the spot rate.

You can select your method anytime during the calendar year and have it applied retroactively.

To select your accounting method, you must first request the appropriate form by calling us at 833-928-4670.

Once you've completed the form, mail it back by December 31 of the year for which the selections are made if you want those selections to be considered when Vanguard prepares your IRS Form 1099.

[LadyGeek]

water2357 - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to this thread.)

This thread is now in the Personal Finance (Not Investing) forum (taxes - cost basis)

[water2357]

The reason I put out the newer post was that no one had any information on the original post. So, I then tried to narrow down my question to the portion (Edited to add: Accounting Method) that I so far have not found anything on, on my own. How do you recommend revising posts that have no responses? Thanks.

Edited to add: I did find a thread on taxation of brokered CDs that has helped on some of my original questions, if anyone else is interested, viewtopic.php?t=372522

Although I'm still not clear on when or whether the cost basis method set by default by Vanguard to FIFO on CDs and Treasuries should be changed to some other method if the CDs and Treasuries are all purchased as new issues. Does anyone have any insight on that topic?

[water2357]

Sorry for the changing post, but I'm trying to determine if it is necessary to select an accounting method for CDs, Treasuries or Bonds in a Vanguard taxable brokerage account. If no one has ever done this or has any insight on what is required, I will attempt to contact Vanguard. Thank you.

[sycamore]

Sorry for the changing post, but I'm trying to determine if it is necessary to select an accounting method for CDs, Treasuries or Bonds in a Vanguard taxable brokerage account. If no one has ever done this or has any insight on what is required, I will attempt to contact Vanguard. Thank you.

1. I have no direct experience with this subject.

2. Is it necessary? Probably not in the strict sense because there's a default method. But I imagine Vanguard and other brokerages offer different methods because the IRS has different ways of dealing with taxes in various situations. Maybe the IRS has documentation that explains the methods better?

3. An older thread mentions the straight line method. As does another older thread. Maybe those threads will be of help. You can probably find more such threads by searching.

[water2357]

Thanks for the links, they brought up references to how to report a bond premium for tax purposes over time. The last time I dealt with a fixed income security that was not purchased at par in a taxable account has been quite a while. I've dealt with the tax reporting changes on mutual fund shares and stocks since brokerages had to report covered share cost basis, but not fixed income.

It sounds like I need to review the current IRS regs on tax reporting for fixed income securities, before even thinking about purchasing any fixed income security at other than par or with accrued interest.

I'm guessing that there is a chance that even purchasing a newly issued Treasury that is not at par, could lead to potential amortization, although I've only seen very small variations from par on new issues.

And a new issue brokered CD should not differ from par, although there might be some fee included in the purchase price(?).

Does anyone know if there truly is some concern with purchasing a new issue brokered CD of having to report an amortized gain/loss in any year before the CD matures?

[toddthebod]

Sorry for the changing post, but I'm trying to determine if it is necessary to select an accounting method for CDs, Treasuries or Bonds in a Vanguard taxable brokerage account. If no one has ever done this or has any insight on what is required, I will attempt to contact Vanguard. Thank you.

Since you can buy identical bonds at different times, it is intuitively obvious that you would need to specify a cost basis method.

You want an example? You buy $10,000 for $9,900 of a 30-year bond at auction. Next year, you buy $10,000 more of the same CUSIP bond on the secondary market for $10,100. A year later, you sell $5,000 face value for $5,200. What's your capital gain on that sale?

[water2357]

Doing a bit more research, I think that the accounting method that Vanguard is referring to potentially having to choose is the method by which the bond premium is amortized over the life of the bond. And this amortization is used to offset the interest paid by the bond each year and is also used to adjust the bond's cost basis each year.

Here is one example I found https://www.law.cornell.edu/cfr/text/26/1.171-2

While the "cost basis method" determines which shares(?) of the bond are being sold, if you only sell a portion of a bond holding, it could also impact the cost basis of any shares remaining after the sale. If you don't sell any of the bond holding before maturity you would still need some type of accounting method to amortize any premium.

I really don''t know exactly how the chosen "cost basis method" and the "accounting method" for a bond could impact each other, e.g. maybe only certain "cost basis methods" would work with a particular "accounting method"???

But Vanguard's default "cost basis method" for bonds is FIFO, and then Vanguard states, per my second post from the top, that you can call Vanguard to select an "accounting method".

As mentioned, I will clearly need to do more research on taxation of fixed income securities.