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Tax Q - Difference between "Average Cost" and "Single Account Average Cost"

edited December 2011 in Fund Discussions
We're all going through this tax BS right now and some of my funds have given me the choice between "Average Cost" and "Single Account Average Cost". Does this mean that "Average Cost" is now a dual-category method, with separate categories for covered and non-covered shares? Under "Average Cost", the basis the MF company will report to the IRS is only the basis of the shares they know about ("covered" shares) so when I file after redeeming non-covered shares and use a different basis for all shares in the account, am I going to get pestered by the IRS?

Presumably, under ""Single Account Average Cost" I have to clue the MF company in on the basis of my non-covered shares. Or maybe I have this backward.

BTW one doesn't have to fill out all this paperwork this year, you can wait until your first redemption to elect the method.



  • The answer to the first part (average cost has two buckets - covered and non-covered shares) is yes. See IRS Cost Basis Reporting Overview and FAQ, FAQ #52.

    Regardless of the cost method used when selling shares, the MF company will report sales of all shares (as before), and cost basis of covered shares. The uncovered share costs are not reported. Note that this is strictly a reporting requirement on the MF company. Regardless of what the fund company reports, you still have the usual obligation of accurately reporting the cost basis of each share sold.

    My take on the FAQ is that it is the fund company (or broker) that has the choice making a "single-account election" (see FAQ #55, 56). Such an election means that the broker/fund company treats all shares as covered shares (FAQ #52: "the shares subject to the single-account election are treated as covered securities.") So you can think of there always being two buckets - covered and uncovered; the only question is which shares fall into which bucket (and with a single-account election, all the shares fall into the covered bucket).

    Since it is the fund company (and not you) that elects to treat the non-covered shares as covered (single-account election), all the fund company can do is say that if you'd like (and it is able), it (i.e. the fund company) will make that election.
    For example, here's Heartland's list of requirements on you before it will make a single-account election.

    Note that Heartland is trying to pin you down by having you say that you have no pre-2012 accounts that got averaged in with the shares in your Heartland account. That's because a single-account election can be made only if the fund company (here, Heartland) knows the cost of the pre-2012 shares in the account you have with them. If you were using average cost prior to 2012, then you had to average the cost of shares in your Heartland account with the cost of any shares of the same fund held at some other broker. Obviously, Heartland would not know about those shares, and so it is telling you that you'd better swear no such shares existed that affected the cost basis of your shares with Heartland.

    (FAQ #55 points out that the cost of pre-2012 shares in one account may be affected by shares in an account held elsewhere.)
  • edited December 2011
    Thanks msf for those links. The Heartland articles goes into more detail than some of the info I've been getting. And some co's, like Vanguard, aren't letting you specify SAAC anyway.

    And only 68 IRS FAQs to read through. It's enough to make you want to vote for Ron Paul.

  • Looks like SAAC is simplest where the MF co knows the basis. I have a few accounts where the MF co knows nothing about the basis since they were opened in the 90s before they even began tracking basis as a courtesy. I guess those are the ones I'll have to have 2 categories for.
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