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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Misstachian on November 17, 2013, 09:24:18 AM

Title: Spec ID vs Avg Cost vs FIFO
Post by: Misstachian on November 17, 2013, 09:24:18 AM
I got a Vanguard pop-up the other day asking whether my purchases (largely of VTSAX) *edit: in my taxable account* should be classified as FIFO, Spec ID, or AvgCost. Vanguard's default is Average Cost, so that's what I was inclined to go with. My dad suggested Spec ID is best for harvesting losses or gains, but Vanguard notes that using a method other than Average Cost means I'll need records for any shares purchased before 1/1/12, and with regular, automatic share purchases, dividend reinvestments, and my habit of dropping a few extra dollars in there if I happen to have them, I haven't kept track of every investment. (Or any, really, although I assume I can go back through Vanguard's records and record each transaction, probably?)

My dad is my usual go-to for advice and I think I understand the theory behind why he likes Spec ID best, but he also likes complicated investments and active trading and thinks I'm crazy for using index funds, so I wondered if people who like to keep things simple had a different thought, or if I should do that and just go back and make a spreadsheet of every old trade. I'm moving my way-too-much-cash into VTSAX right now (putting extra cash in twice a month in addition to my regular investments), and I want to do whatever makes the most sense. I'd love any advice. Thanks!

*Thanks, Brewer.
Title: Re: Spec ID vs Avg Cost vs FIFO
Post by: brewer12345 on November 17, 2013, 09:37:08 AM
First, unless this is in a taxable account it really does not matter.

If this is a taxable account, I strongly prefer to choose my own tax lots.  Consider:  After years of regular investing you need to raise $X0,000.  You go to your brokerage account and decide to sell that amount of VTSAX.  Most shares are long term holds that are in a gain position.  The last $5,000 of contributions are currently at a loss.  You are in a 25% or higher tax bracket.  Wouldn't it be nice to sell the $5k at a loss plus the least appreciated of your remaining shares to end up with a minimal capita gains tax bill?  Say less than 5% of your amount raised rather than 15% or more? This gets even more enticing if you eventually plan to FIRE.  Once you do so, it is highly likely you will be in the 15% or lower bracket which means the long term cap gains tax is 0%.  That is right, zero.

I would have a close look at what VG offers in the way of share lot price accounting and maybe have a discussion with them if its not apparent on their site.  There is a ton of value to being able to identify specific lots.
Title: Re: Spec ID vs Avg Cost vs FIFO
Post by: Misstachian on November 20, 2013, 12:15:50 PM
Thanks, Brewer, that makes a lot of sense. By your reasoning I think I should choose Specific share identification (Spec ID).

So maybe my question should be even more basic. How do I identify specific lots when selling? By date bought, by price bought, both? Wikipedia says, "Specific share identification is the most record and labor intensive, as one must track all purchases and sales and specify which share was sold on which date. It almost always allows the lowest tax bill, however, as one has discretion on which gains to realize."

I have almost entirely bought stock, not sold, and when I've sold, it's been all shares of a specific stock. So what do I need to keep track of? Does anyone have a great way of doing this? Just how labor-intensive are we talking? I'm devoted to index funds partially for the simplicity, as I think I have some sense of how much I don't understand, and I don't want to give future-me major headaches. I'll have to go back and get records for any stocks bought before January 1, 2012, it sounds like. It also sounds like this is probably worth it, but if anyone has a great spreadsheet template or something, I'd be grateful.
Title: Re: Spec ID vs Avg Cost vs FIFO
Post by: the fixer on November 20, 2013, 12:25:12 PM
If you want to see how it works, pretend to execute a sale on Vanguard. You can go all the way through to the final screen where it says "once you execute this transaction, it cannot be cancelled," then be sure NOT to keep going!

The sell interface will be where you tell it to sell $X of a fund. You should then see a popup or something (I've only done this a handful of times and it was a while ago) asking you to type in numbers for which lots you want to sell. It's pretty intuitive, but going through it should clear up any anxiety.

I don't know what will happen for the shares prior to 2012, as I haven't sold any of mine yet.
Title: Re: Spec ID vs Avg Cost vs FIFO
Post by: Nancy on November 20, 2013, 04:56:36 PM
Thanks for posting this question as this issue wasn't on my radar. I went to the Bogleheads forum and read about SpecId ( which doesn't seem too difficult):