Weigh the pros and cons of each calculation method to pick one that best fits your investing style and tax situation.
When we calculate cost basis for your Vanguard investments, we'll automatically use "average cost" for mutual funds and "first in, first out" for individual stocks.
But you can change those settings—or use "specific identification" if you're more of a hands-on investor. Easy to use. This method averages the purchase price of your shares and bases the holding period on the earliest date the shares were acquired. You must elect out of or into this method in writing. This may make certain tax planning, such as gifting or charitable giving, less advantageous.
In limited circumstances, long-term gains or losses may be converted to short-term. Requires more effort: Generally you must specify the shares to be sold or transferred before the settlement date and Vanguard must confirm those specifications back to you within a reasonable time. Sells first the shares for which we don't know the acquisition date, followed by the shares with the earliest acquisition date.
It's best to set your cost basis method immediately after you buy or acquire shares of a new investment. If you don't, when you sell shares of that investment, you'll have to pick a method before you can complete the transaction.
Even if you've already selected—and even used—one of these cost basis calculation methods, you can change it for future sales whenever you want. Above descriptions and examples are for informational purposes only and do not constitute tax advice.
This information is not intended or written to be used in connection with the promotion, marketing or recommendation for the purpose of avoiding U. Please consult with your tax adviser regarding the appropriate cost basis method s for your tax situation. Sit Mutual Funds investor services representatives are not licensed tax advisers and cannot give tax advice. Please consult your tax adviser to determine which method may be best for your situation.
To select the method of cost basis calculation for your Sit account use the Cost Basis Election Form. Current cost basis data is available through Account Access. Investor service representatives can also provide current cost basis information. They can be reached at , weekdays between a.
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Investors must pay taxes on any investment gains they realize. Subsequently, any capital gain realized by an investor over the course of a year must be identified when they file their income taxes. For this reason, being able to accurately calculate the cost basis of an investment, particularly one in a mutual fund , becomes extremely important.
The cost basis represents the original value of an asset that has been adjusted for stock splits , dividends, and capital distributions. It is important for tax purposes because the value of the cost basis will determine the size of the capital gain that is taxed.
The calculation of cost basis becomes confusing when dealing with mutual funds because they often pay dividends and capital gains distributions usually are reinvested in the fund. When shares of a fund are sold, the investor has a few different options as to which cost basis to use to calculate the capital gain or loss on the sale.
The first in, first out method FIFO simply states that the first shares purchased are also the ones to be sold first. Subsequently, each investment in the fund has its own cost basis.
The average cost single category method calculates the cost basis by taking the total investments made, including dividends and capital gains, and dividing the total by the number of shares held.
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