choosing a cost basis accounting method with Vanguard

[sol]

We're about to redeem a large chunk of money from our taxable investment money to put a down payment on a house.

Funds are in VTSAX, VIPSX, and VFIIX.  Some have unrealized short term and long term gains, some have unrealized short and long term losses. 

Is there a general strategy for choosing a cost basis accounting method to minimize taxes?  Can I elect to sell only older shares to avoid the short term capital gains tax rate?  Do I sell some from the losing funds and some from the gaining funds to try to cancel out as much as possible?  Do I want to sell shares that are more than a year old, but that have the minimum amount of unrealized gains?

I've never sold anything from our taxable account before, as we're firmly in the wealth-building phase and just buy buy buy, so I'm not sure how this works.

Has anyone tried to just call Vanguard directly to ask these sorts of questions?

[MDM]

Have you tried a "dry run" on the sales using the Vanguard web site?

Don't have experience with Vanguard (nor selling funds either), but have sold individual stocks accumulated over time.  In that case we could identify the specific lots to sell.  The online tool would provide an "estimated tax consequence" based on the current stock price before we had to click the "Yes, Complete the Sale" button.

I think the answer to all your strategy questions is "yes".  We looked to sell in the following order:
 -  Short term losses
 -  Long term losses
 -  Long term gains
 -  Short term gains

You can get into details about the $3K limit on capital losses, etc. but you seem to have good enough instincts to do it well.

[sol]

It looks like Vanguard doesn't keep track of specific lot purchases prior to January 1, 2012.  And changing your cost basis to "Specific ID" doesn't give you immediate access to sell specific shares, so maybe later this week I can try the suggested "dry run" version of the sale before confirming anything.

[sol]

Have you tried a "dry run" on the sales using the Vanguard web site?

Thanks for the tip.  It looks like we're actually better off selling more of our recent short term capital gains rather than our older long term capital gains.  The market has just been up too much, so the LTCG amounts are much larger for purchased lots of equal size despite the better tax treatment.

I'd much rather pay the 25% STCG rate on $2k in recent gains than the LTCG rate of 15% on $5k in older gains, to get the same amount of money out of the fund.  I can see how this would be a bad plan for some people because you're just carrying that LTCG rate to pay later, but we intend to retire on less than $72k for Married Filing Jointly so our LTCG rate in retirement should be zero.

Now the question becomes one of market timing.  Do I pull the funds tonight or let them ride for a few more days in the hopes the current market momentum works in our favor?

[mxt0133]

The saying "a bird in your hand is worth more than two in a bush" seems to apply to this line of thought.  I would say pick a date to sell and do it.  Generally people feel worse with a 2-3% loss than they would feel better about a 2-3% gain.

[foobar]

It is probably better to sell your short term gains before long term gains up until the amount of losses. The advantage of doing this is that they tend to have a higher cost basis than your LTGC.

The tricky part is figuring out how to sell AND to keep a somewhat balanced portfolio.

Have you tried a "dry run" on the sales using the Vanguard web site?

Don't have experience with Vanguard (nor selling funds either), but have sold individual stocks accumulated over time.  In that case we could identify the specific lots to sell.  The online tool would provide an "estimated tax consequence" based on the current stock price before we had to click the "Yes, Complete the Sale" button.

I think the answer to all your strategy questions is "yes".  We looked to sell in the following order:
 -  Short term losses
 -  Long term losses
 -  Long term gains
 -  Short term gains

You can get into details about the $3K limit on capital losses, etc. but you seem to have good enough instincts to do it well.

[sol]

It is probably better to sell your short term gains before long term gains up until the amount of losses. The advantage of doing this is that they tend to have a higher cost basis than your LTGC.

Because the market was up SO much last year, and has been mostly flat in the past few months, the cost basis on my LTCG is actually higher than my STCG.  Even accounting for the higher taxes, I can withdraw the same amount of money for less total tax due by selling recent STCG that haven't appreciated much and paying 25% than I can by selling older LTCG that have appreciated a whole bunch and pay 15%. 

But the Vanguard site makes the numbers available to you if you have the patience to sift through all the lots and take careful notes. 

Short Answer:  changing your cost basis to SpecID is totally the way to go if you're going to be trying to harvest gains or losses in your taxable account.  You'll pay more in taxes with either of the alternative cost basis accounting methods.