Cost Basis Tracking/Reporting Methods

[Tasse]

I'm considering donating stocks out of my taxable account.* I invest at Fidelity, and the account contains some individual stocks and some mutual funds and we would potentially donate some of both. While researching this,** I learned that it's important to change the cost basis tracking method from "Average Cost" to "Actual Cost" in order to effectively donate the highest-appreciated shares of mutual funds.

I understand the mechanics of this difference, but not the implications. When you start this process at Fidelity, you are greeted with a large disclaimer*** urging you to consult a tax advisor. Internet tax advisors: in what circumstances would "Average Cost" be more advantageous?


*If you want to persuade me to use a DAF instead, I'm interested in the argument but I'm already having it in other threads.

**https://www.reddit.com/r/fidelityinvestments/comments/vm7mhx/fidelity_charitables_maximize_the_tax_advantage/

***This disclaimer includes a link to "learn more about cost basis methods," but it's broken.

Convert Cost Basis from Average Cost to Specific Share

This process will convert the method Fidelity uses to track cost basis information for mutual funds held in Fidelity Retail accounts.

Fidelity may be able to convert the method it uses to track cost basis information reported to you for mutual fund positions from the average cost method to the specific shares method. Please make sure that you understand the consequences of converting from average cost to specific identification.

In 2012, new cost basis rules took effect for mutual fund shares. The IRS now permits taxpayers to prospectively change from the average basis method to another method at any time. Further, a change from average cost to another method will apply on an account by account basis (note that covered and noncovered shares are treated as being held in separate accounts for IRS purposes).

Before you proceed with your request, you must review and agree to the following Terms and Conditions.

TERMS AND CONDITIONS

You are changing the cost basis method for IRS Form 1099-B tax reporting purposes.

You understand that specific shares must be identified at the time of the sale (no later than settlement date), and unidentified shares will be sold based on the account level default disposal method.

Your change from the average cost method to the specific identification method will be prospective only. If you sold shares of a position in this account while it was set to the average cost method, shares acquired before converting to the specific identification method will retain their historic average cost basis going forward. Please consult your tax advisor if you do not understand the tax consequences of making this conversion.

[Tasse]

Remembered in the instant after posting that there's a Taxes subforum. My apologies if this would be more appropriate over there.

[secondcor521]

It would be rare, in my opinion, for average cost to be "better" than specific ID.  The only advantage I can think of offhand is that average cost is ever so slightly easier than spec ID when you actually sell shares.

The only situation where I would see it being useful is if a taxpayer had already sold some shares at average cost basis and didn't want to (or wasn't able to) then switch to spec ID.

It used to be that when you used average cost and then sold, you were locked into average cost forever.  Now, it seems you can switch from average cost to spec ID and, if you had already sold, the shares before the switch would retain their average cost basis and shares after the switch can use spec ID.

...

The reasons I can think of to use a DAF instead of just direct gifting to charity:

1.  For tax reasons, you want the full charitable deduction now and want to make the donations later.

2.  You want the anonymity that comes with giving from a DAF.  The charity doesn't get your name.

3.  You've got a lot of charities you support, and using a DAF makes the mechanics easier than transferring a bunch of shares directly yourselves.