Author Topic: Trouble understanding short vs long term cap gains on periodic investments  (Read 3049 times)

nikhilm

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I currently automatically transfer money to various vanguard index funds from my paycheck. That said, I'm quite inexperienced at understanding the nuances of investments and taxes. By the simple definition, if I sold some of the funds, it counts as a short term gain if it has been less than a year, and long term otherwise. But how does this work for a periodic investment?

Say I buy $1000 worth of a fund a month for the last 2 years, and sell now, is there some linear interpolation that occurs to see how much of that is taxed long-term and how much is short-term? Is there some vanguard feature that will let me see this ratio before I actually sell?

Thanks!

MDM

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Say I buy $1000 worth of a fund a month for the last 2 years, and sell now, is there some linear interpolation that occurs to see how much of that is taxed long-term and how much is short-term? Is there some vanguard feature that will let me see this ratio before I actually sell?

See https://personal.vanguard.com/jumppage/costbasis/CostBasisMethod.html.

catccc

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That vanguard link address cost basis, but it doesn't really address holding period, which is what the OP is concerned with.

I'm not sure, but I think you'll have to look back and see what portion of your sale was purchased less than one year ago v. more than a year ago, and deal with it on a FIFO basis.  again, not quite sure, but I can hardly see how the IRS wouldn't allow you to do it this way.

Unless you are dealing with stock splits and spin-offs, in which case your holding period might be the same as the original purchase date.

Eric

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Unless you set it up otherwise, I believe the default is First In First Out.  So when you sell, they'll automatically sell your oldest shares.  If all of those shares were held longer than a year, then you're at the long term capital gains rate for the whole sale.

MDM

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Unless you set it up otherwise, I believe the default is First In First Out.  So when you sell, they'll automatically sell your oldest shares.  If all of those shares were held longer than a year, then you're at the long term capital gains rate for the whole sale.
That is correct.  The "unless you set it up otherwise" is the reason cost basis selection is applicable: if you select specific lots you can make the short/long distinction according to the lots you select.  Otherwise, if you use either FIFO or average for the cost basis, the shares are considered sold in FIFO order.

See pages 46-47 in http://www.irs.gov/pub/irs-pdf/p550.pdf.

nikhilm

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Thanks everyone! I looked at the cost basis page, and went through the sell steps (Canceled at the final step) and that helped me understand it. Vanguard lets me select which ones to sell using the avg/fifo/custom method.

secondcor521

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Holding period, like cost basis, is tracked by lot (a lot is a group of shares).  Each month's purchase would be a specific lot, with it's own cost basis ($1000 in this example), and it's own purchase date, which would in turn determine the holding period.

On your tax return (schedule D) you are allowed to group lots of shares if they are for the same stock and have the same holding period.  So in the OP's example, you would have two lines on your schedule D:  one a long-term capital gain or loss with a basis of $12,000 and purchase dates of "various" which would be the group of purchases from the first year, and one a short-term capital gain or loss with a basis of $12,000 and purchase dates of "various" which would be the group of purchases from the second year.