Taxes for taxable account?

[El Gringo]

I'm thinking of opening a taxable account and purchasing Vanguard's Total Stock ETF and Total International Stock ETF and holding them. I've never had a taxable investing account before. Come tax time, will it be fairly simple to declare these assets? I only have to worry about the limited dividends I've received, right? And that would be pretty simple to declare?

[seattlecyclone]

You have to declare dividends and capital gains/losses (which happen every time you sell shares). Your brokerage will send you (and the IRS) a statement at the end of the year that says how much dividend income you had, and also the total value of all shares you sold during the year, among other things.

It's usually pretty easy to declare. You have to list all sales of stock on IRS Form 8949. The gains from these forms get totaled up onto Form 1040, Schedule D and later reported on the capital gains line of Form 1040. The key is to keep good records of when you buy and sell shares and how much cash you paid or received in the transaction so that you can report your gains accurately.

[El Gringo]

I don't plan on selling shares often (even for years). But once I eventually do, how are capital gains calculated when I have purchased the same shares multiples times at various prices?

Let's say I buy 1 share of X ETF at $10 today.
Next year I buy 1 share of X ETF at $20.
Three years later I sell 1 share of X ETF for $50.

Is my capital gain $40 or $30?

[seattlecyclone]

It's whichever you want. By default, the IRS assumes you sold the oldest share first. But you should have the option when selling shares to identify a different "tax lot" you want to sell out of. If you do that you can say you want to sell the newer share instead, and recognize a $30 capital gain instead of a $40 capital gain.

[El Gringo]

Ah ok. And I believe I read a long time ago that ETFs are generally more tax-efficient than mutual funds because of how they pay out dividends. Is this true?

[Spork]

I can't recall exactly, but my vague memory is that there were some mandatory regulations put in over the past 3-4 years that's made buying/selling/dividends from securities almost a no brainer.

I now get (and I think you're required to get) a sheet that gives everything you'd ever want to know (including cost basis) for every security I've touched over the last tax year.  Assuming you don't have securities that were transferred into the account with no history... it's pretty easy.

[El Gringo]

Awesome! I was hoping to hear that! :)

[Spork]

If you're on a paper statement, you'll probably "just get the right forms" from Vanguard.  If you're on electronic statements, you'll have to go fish for them.  I've got accounts with a couple different online brokers and both have something along the lines of "Tax Center".  You'll find 1099's there (where they report dividends) and some sort of cost basis reports (no idea if there's an IRS number for that) that will say something like (from memory, I am sure I am leaving out columns).
Jan 4th, 2012, sold 5 shares FOO .....  gain/loss: $124.00

[xocotl]

You'll find 1099's there (where they report dividends) and some sort of cost basis reports (no idea if there's an IRS number for that) that will say something like (from memory, I am sure I am leaving out columns).
Jan 4th, 2012, sold 5 shares FOO .....  gain/loss: $124.00

They're all 1099. My brokerage gives a "Consolidated Forms 1099", containing 1099-INT (interest), 1099-DIV (dividends), 1099-OID (bond stuff), 1099-MISC (payments-in-lieu, etc), and 1099-B (broker transactions -- cost basis, gains, etc.). The instructions for forms 1040, Schedule D and Form 8949 tell you exactly where to copy all the values to when filing your taxes. The new regulations have made it all super easy.

Unless you do really complicated things involving cross-account wash sales, constructive sales, or straddles, in which case it's still painful. But if you're just buying mutual funds you don't have to worry about any of that :).

[alanwbaker]

Ah ok. And I believe I read a long time ago that ETFs are generally more tax-efficient than mutual funds because of how they pay out dividends. Is this true?

Hmm.  Other things being equal (they never are), ETF's and funds should be identical in tax efficiency.  However, funds can be exchanged within a fund family (not a taxable event), whereas ETF's cannot.