Author Topic: Cost Basis Selection in Vanguard Mutual Funds  (Read 5974 times)

Wolf359

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Cost Basis Selection in Vanguard Mutual Funds
« on: February 22, 2015, 01:41:08 PM »
I have been consolidating all my accounts at Vanguard, and Iím putting all my assets into the 3-fund passive indexing method.  I currently have only mutual funds.  For my taxable account, what should I select for my cost basis?  Is specific identification always the best choice for default?
If all goes according to plan, these accounts will have decades of dollar cost averaged deposits, dividend or capital gains reinvestments, and eventually withdrawals.  The record keeping sounds daunting at this point.

If I use average cost, I lose flexibility.  If I use First In, First Out, I pay maximum taxes.

Should I take steps to simplify the records, like using average cost for bond funds (where capital gains donít matter so much)?  Or not automatically re-invest dividends or capital gains, so I can re-invest them in one lump sum (and not monthly)?  My automated investments are currently done per paycheck, should I make that once a month? 

What do the more experienced people do?  How do you handle your cost basis accounting and record keeping? 
Itís simple now, but what about years from now?  I donít want record keeping to be my full-time job in retirement.  The point of passive indexing is to keep it simple.

seattlecyclone

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #1 on: February 22, 2015, 02:26:16 PM »
I use specific identification so that I can optimize things. Vanguard keeps track of all of your tax lots so the recordkeeping isn't a problem anymore for covered shares. Just pick the lot(s) with the lowest tax burden when you decide to sell.

Indexer

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #2 on: February 22, 2015, 02:30:01 PM »
I would do spec ID. 

I would never do FIFO.  Simple reason being that unless you plan on using up all the money there will be something left and you want that to be the lowest cost basis shares... likely the oldest ones.  That way your beneficiaries get the stepped up cost basis instead of you paying taxes on it.

madamwitty

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #3 on: February 22, 2015, 02:41:48 PM »
I use specific identification so that I can optimize things. Vanguard keeps track of all of your tax lots so the recordkeeping isn't a problem anymore for covered shares. Just pick the lot(s) with the lowest tax burden when you decide to sell.
Oooh! That sound easy. I am glad OP brought up this topic since I will be (re)starting an account with Vanguard soon too.

Wolf359

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #4 on: February 22, 2015, 04:36:48 PM »
I use specific identification so that I can optimize things. Vanguard keeps track of all of your tax lots so the recordkeeping isn't a problem anymore for covered shares. Just pick the lot(s) with the lowest tax burden when you decide to sell.

So you don't do anything to simplify the records?  Or retain them independently?  A re-invested bond fund generates a tax lot each month (12 per year).  A re-invested capital gain occurs quarterly (4 per year).  If I'm dollar-cost averaging twice a month, I'll have 28-36 new tax lots generated per fund, per year.  Hopefully for 40-50 years.  How long does Vanguard retain records?  Can I download the records so I have a backup?  I found I can track the statements, but I don't want to retype them into a spreadsheet.  I'll probably resort to paper as well, if I'm keeping records that long.

Do you do anything to back them up, in case Vanguard's records expire or are faulty?  How do you plan to track your cost basis records over decades?

When I look at Vanguard's statements, I see that they have the option to look up statements back to 2006.  That implies that they only keep about 10 years of history online.  That may be different because of the new cost basis rules.  I'll end up asking their customer support that question.

I'm presuming, though, that people who have had accounts with them for a while have had to do it manually. How do you handle it?

RapmasterD

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #5 on: February 22, 2015, 05:51:59 PM »
It's worth a call to Customer Service.

Where it gets tricky is if you move holdings over to Vanguard that you didn't acquire within or on the Vanguard platform.

Otherwise, if you purchased said holding(s) at Vanguard, then regardless of the fact that their statements only go back to 2006, I have to believe that if you click on COST BASIS under MY ACCOUNTS (note: this navi could change as they're about to update their website), you will get the complete cost basis for a holding. But I may be incorrect on this one!

Wolf359

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #6 on: February 22, 2015, 06:30:08 PM »
It's worth a call to Customer Service.

Where it gets tricky is if you move holdings over to Vanguard that you didn't acquire within or on the Vanguard platform.

Otherwise, if you purchased said holding(s) at Vanguard, then regardless of the fact that their statements only go back to 2006, I have to believe that if you click on COST BASIS under MY ACCOUNTS (note: this navi could change as they're about to update their website), you will get the complete cost basis for a holding. But I may be incorrect on this one!

I've already submitted the question via secure message.  I was just wondering how the more experienced hands deal with cost basis over a long time held account.

Wolf359

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #7 on: February 22, 2015, 06:36:50 PM »
If you are keeping records yourself, isn't it nearly as much work to track the average cost basis for the average method? To compute the average cost basis, you need a record of every purchase you ever made of the security.
I really don't want to keep the records and figure them out manually.  If I have to, then I want to simplify the records I have to calculate.

I think it's more of a matter of intending to use the cost basis they report, but then having the paper records in case I have to do it all manually.  In either case, I want to figure out how I'm going to do it. 

Right now, it's easy.  I only have a few purchases, and records for something like 1-2 months.  I'm just looking ahead 20 years, and I'd rather set it up right at the beginning, rather than have a massive headache later.

I may still make the same allocation and purchase decisions, but then I'll have considered how it affects record keeping and done it deliberately.

seattlecyclone

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #8 on: February 22, 2015, 06:47:11 PM »
I use specific identification so that I can optimize things. Vanguard keeps track of all of your tax lots so the recordkeeping isn't a problem anymore for covered shares. Just pick the lot(s) with the lowest tax burden when you decide to sell.

So you don't do anything to simplify the records?  Or retain them independently?  A re-invested bond fund generates a tax lot each month (12 per year).  A re-invested capital gain occurs quarterly (4 per year).  If I'm dollar-cost averaging twice a month, I'll have 28-36 new tax lots generated per fund, per year.  Hopefully for 40-50 years.  How long does Vanguard retain records?  Can I download the records so I have a backup?  I found I can track the statements, but I don't want to retype them into a spreadsheet.  I'll probably resort to paper as well, if I'm keeping records that long.

Do you do anything to back them up, in case Vanguard's records expire or are faulty?  How do you plan to track your cost basis records over decades?

When I look at Vanguard's statements, I see that they have the option to look up statements back to 2006.  That implies that they only keep about 10 years of history online.  That may be different because of the new cost basis rules.  I'll end up asking their customer support that question.

I'm presuming, though, that people who have had accounts with them for a while have had to do it manually. How do you handle it?

My understanding is that brokers are now required to track cost basis indefinitely for any shares you have bought in the past few years, and any shares you buy from now on. I would probably download a list of transactions periodically so that I could have those records in case Vanguard's computer systems somehow suffered a catastrophic failure, but that's extremely unlikely. I generally trust them to do the recordkeeping that the law requires.

johnny847

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #9 on: February 22, 2015, 07:49:47 PM »
If you are keeping records yourself, isn't it nearly as much work to track the average cost basis for the average method? To compute the average cost basis, you need a record of every purchase you ever made of the security.
I really don't want to keep the records and figure them out manually.  If I have to, then I want to simplify the records I have to calculate.

I think it's more of a matter of intending to use the cost basis they report, but then having the paper records in case I have to do it all manually.  In either case, I want to figure out how I'm going to do it. 

Right now, it's easy.  I only have a few purchases, and records for something like 1-2 months.  I'm just looking ahead 20 years, and I'd rather set it up right at the beginning, rather than have a massive headache later.

I may still make the same allocation and purchase decisions, but then I'll have considered how it affects record keeping and done it deliberately.

What seattlecyclone said is correct. From Vanguard's page https://personal.vanguard.com/us/help/FAQCostBasisContent.jsp
Quote
Covered shares are shares for which Vanguard must report cost basis information to the IRS on Form 1099-B when sold. Covered shares are stocks that you acquired on or after January 1, 2011, and mutual funds,* dividend reinvestment plans (DRIPS), and most ETFs** that you acquired on or after January 1, 2012. Noncovered shares are shares that you acquired before those effective dates.

Your fear of Vanguard failing to properly report the cost basis to the IRS is in my opinion not something to worry about, as again, seattlecyclone said. You think you're going to be in a bind if you can't produce the correct cost basis information, but think about the kind of bind that Vanguard would be in if they can't produce cost basis information for even a small portion of its many customers. This is something that Vanguard does not want to happen, and I have full faith that Vanguard backs up that data along with the rest of the data about your account.
Just download all of your transaction history (you can even have Vanguard alert you when transaction confirmations are ready). If in the event that Vanguard cannot produce the cost basis information you need, or it is incorrect, then you can reconstruct it from said confirmations, with help from others such as people on this forum if need be. And as Cathy pointed out, this should be easier than using average cost basis, because with average cost basis you have to compute the average cost. With specific ID, you just need to comb through your shares and pick out which shares have the highest cost basis in order to minimize your capital gains. And then eventually in this hypothetical scenario of Vanguard losing or incorrectly tracking cost basis information, Vanguard will eventually fix their systems to update the cost basis information because it is required by law. I'm sure you will be able to update Vanguard with the cost basis information for any sales you have made during this hypothetical period. I believe at the moment customers can manually provide cost basis information to Vanguard of noncovered shares in taxable accounts.

RapmasterD

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Re: Cost Basis Selection in Vanguard Mutual Funds
« Reply #10 on: February 23, 2015, 03:27:56 PM »
It's worth a call to Customer Service.

Where it gets tricky is if you move holdings over to Vanguard that you didn't acquire within or on the Vanguard platform.

Otherwise, if you purchased said holding(s) at Vanguard, then regardless of the fact that their statements only go back to 2006, I have to believe that if you click on COST BASIS under MY ACCOUNTS (note: this navi could change as they're about to update their website), you will get the complete cost basis for a holding. But I may be incorrect on this one!

For me, Specific ID....no brainer. Enables the most control by far.