Selling chunk of brokerage for down payment - cost basis?

[renata ricotta]

I just went under contract on purchasing a single family home, and about 2/3 of my down payment will be coming from my taxable brokerage account. So, I'll be making my very first sale out of that account since I started it 5-6 years ago, and a big one at that; up until now I've considered it untouchable savings.

The rest of the down payment plus closing costs will be coming from my high-yield online savings account, which I have been prioritizing for the past year in anticipation of buying a house in a HCOL area. So that means I have not been contributing to my taxable brokerage the last year, so the vast majority of my gains in the account are long term rather than short term.

I think the best cost basis to elect is average, but would love some additional opinions before pulling the trigger

- Amount to be withdrawn: $208k
- Total cost of account: $286,007
- Market value as of today: $454,137
- Short-term gains: $2,216.65 (from dividends, not contributions, bc I haven't been contributing this year)
- Long-term gains: $165,913.91
- Total gains: $168,130.56

It seems like in general the downside of average cost is that you could unnecessarily realize STCG. But, the proportion of my gains that are short term are quite small compared to the LTCGs, so I think any excess tax burden would be pretty marginal. Specific ID would eliminate even this marginal tax, but honestly I don't think I'm up for that kind of complexity unless it would be a huge benefit.

Am I missing some big boon for First In/First Out or Highest In/Highest Out?

Escrow closes in about 20 days, so I have to pick soon!

Additionally, @Wintergreen78 posted a related question about whether to use Roth contributions for a portion of this: https://forum.mrmoneymustache.com/taxes/down-payment-cash-high-tax-bracket/

I do have about $20k of contributions in a Roth from several years ago (back when I was under the income limits, it's just been chilling since about 2015). Curious if people have strong feelings about using that as a portion of the amount I need to liquidate in the coming month.

[ixtap]

If you have other means, it is probably best to allow the Roth to continue to grow in place.

Does your brokerage not have a Spec ID option? This allows you to choose lots individually, which gives you the most control over the taxes due. If you bought something in the last few months, it may make sense to sell with short term gains (or even losses).

[renata ricotta]

If you have other means, it is probably best to allow the Roth to continue to grow in place.

Does your brokerage not have a Spec ID option? This allows you to choose lots individually, which gives you the most control over the taxes due. If you bought something in the last few months, it may make sense to sell with short term gains (or even losses).

I certainly have other means, and hadn't been considering the Roth contributions.

It's a Vanguard account so it does have a Spec ID option; my concern is that I won't correctly pick the right IDs, or would mess up the recordkeeping come tax time. I've been contributing to the account since 2015, with most of the purchases being small ($500-5,000 whenever I had an excess of cash around) but with several big buys (proceeds from sale of condo, big bonus payments in previous job, etc.) So, the list of shares I could ID is pretty long and varied.

Is there a calculator that could help me identify which IDs I would pick to minimize burden? I'm not sure how to go about the math on my own.

[ixtap]

If you have other means, it is probably best to allow the Roth to continue to grow in place.

Does your brokerage not have a Spec ID option? This allows you to choose lots individually, which gives you the most control over the taxes due. If you bought something in the last few months, it may make sense to sell with short term gains (or even losses).

I certainly have other means, and hadn't been considering the Roth contributions.

It's a Vanguard account so it does have a Spec ID option; my concern is that I won't correctly pick the right IDs, or would mess up the recordkeeping come tax time. I've been contributing to the account since 2015, with most of the purchases being small ($500-5,000 whenever I had an excess of cash around) but with several big buys (proceeds from sale of condo, big bonus payments in previous job, etc.) So, the list of shares I could ID is pretty long and varied.

Is there a calculator that could help me identify which IDs I would pick to minimize burden? I'm not sure how to go about the math on my own.

When you look at the Spec IDs, does Vanguard show you the date and gain for each lot? You will be charged short term capital gains (your tax bracket for the year) for anything less than a year old and long term capital gains (probably 15%, but it does depend on your income) for those lots purchased more than a year ago. Does anything have a loss?

[renata ricotta]

If you have other means, it is probably best to allow the Roth to continue to grow in place.

Does your brokerage not have a Spec ID option? This allows you to choose lots individually, which gives you the most control over the taxes due. If you bought something in the last few months, it may make sense to sell with short term gains (or even losses).

I certainly have other means, and hadn't been considering the Roth contributions.

It's a Vanguard account so it does have a Spec ID option; my concern is that I won't correctly pick the right IDs, or would mess up the recordkeeping come tax time. I've been contributing to the account since 2015, with most of the purchases being small ($500-5,000 whenever I had an excess of cash around) but with several big buys (proceeds from sale of condo, big bonus payments in previous job, etc.) So, the list of shares I could ID is pretty long and varied.

Is there a calculator that could help me identify which IDs I would pick to minimize burden? I'm not sure how to go about the math on my own.

When you look at the Spec IDs, does Vanguard show you the date and gain for each lot? You will be charged short term capital gains (your tax bracket for the year) for anything less than a year old and long term capital gains (probably 15%, but it does depend on your income) for those lots purchased more than a year ago. Does anything have a loss?

Yes, I can see the table for each lot in the detail section of my account. Absolutely nothing has a loss, it's green all the way down!

Is the idea of prioritizing short term gains because although the tax rate will be higher, the absolute dollar value of gains will be lower? If that's the case, would I choose the most recently purchased stocks with the Specific ID (up to the amount I need), because they were all bought at a higher price than the VTSAX shares I bought back in 2015? Basically the opposite of FIFO - Last In First Out.

[renata ricotta]

Actually, I suppose that's the Vanguard option "Highest In, First Out" -- highest relating to the highest share price. According to Vanguard, the pro is that this "Maximizes losses and minimizes gains for tax purposes," and the con is "Doesn't consider holding period. May recognize short-term gains before long-term gains."

But, since my short-term gains are such a small part of my portfolio, and the absolute dollars are pretty low (especially compared to the huge percentage gains on my longest-held shares), maybe that "con" is fine with me. I'd be keeping the VTSAX shares I bought back in 2015 for $60/share and selling the more recent shares bought at $90+.

[reeshau]

The other issue with average basis is that once you are there, you are forever there (for those shares)

As Vanguard itself says:

"*If average cost was previously used, the shares you acquired before the method change may be locked with the average basis. By law, to revoke the average basis, you must change your cost basis method before the first sale, transfer, or disposition."

So think about this decision, not just in this case, but in any case you would use this account for.  Or, make sure and change the method back before you buy new shares (to avoid getting hit with short term gains) but then you will have a mixed situation.

For me, it would be worth the pain to go through SpecID.  If not, then choose one of the others, and be comfortable that It's not fully optimized.  It is worth the effort, or not.  I have seen calculators that will tell you the result, but not necessarily an optimized that would pick an ideal scenario.

Is this multiple funds? If it was all VTSAX, and all long-term gains, that would be pretty easy to do: just pick the highest cost buys until you make your number.  Of course, that's HIFO, anyway.

[renata ricotta]

The other issue with average basis is that once you are there, you are forever there (for those shares)

As Vanguard itself says:

"*If average cost was previously used, the shares you acquired before the method change may be locked with the average basis. By law, to revoke the average basis, you must change your cost basis method before the first sale, transfer, or disposition."

So think about this decision, not just in this case, but in any case you would use this account for.  Or, make sure and change the method back before you buy new shares (to avoid getting hit with short term gains) but then you will have a mixed situation.

For me, it would be worth the pain to go through SpecID.  If not, then choose one of the others, and be comfortable that It's not fully optimized.  It is worth the effort, or not.  I have seen calculators that will tell you the result, but not necessarily an optimized that would pick an ideal scenario.

Is this multiple funds? If it was all VTSAX, and all long-term gains, that would be pretty easy to do: just pick the highest cost buys until you make your number.  Of course, that's HIFO, anyway.

Yes - all of my shares pre-December 2018 have the exact same average cost basis of $60.93 (when I changed my default to SpecID). I didn't realize back then that it wouldn't retroactively allow me to use SpecID on previous shares. It sounds like I still could (?), but I would have had to keep track of the purchase price for all those transactions and I didn't.

I think I'm going to go with HIFO for my down payment to minimize the capital gains taxes I'll pay in 2021.

Edited to answer your other question: Yes, it's all VTSAX, and it is 98% long term capital gains.