Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
- Jaffe says that when dumping everything, cost basis method doesn't matter. It does, and is generally the only time I prefer average cost to specific shares. With average cost in a rising market, the short term shares' cost drops, and the long term shares' cost rises. That shifts short term gain into long term gain, which reduces your taxes.
- Generally, the default method doesn't matter if you're attentive, because you can override it when you sell. And if you're not attentive, you're not going to pay attention to this article anyway
- The time you have to change your mind is the settlement date, not the date of the sale. (For mutual funds, that can be the market close if you're dealing directly with the fund company, T+1 for most funds through brokers, or T+3 for some funds/brokers. You need to check for the particular fund.)
This whole thing is so much simpler than people (and the IRS) make it out to be. There are only two questions when selling shares: which shares were sold, and how much did those particular shares cost?
If you are using average cost, then you are selling FIFO - oldest first - there is no choice. And that's what you usually want, assuming there's a gain. That way, your gain shows up as long term gain, and you get taxed less.
If you're not using average cost, then the cost of each share is what you paid for it *. The only question is which shares are you selling. You can pick the shares yourself, one by one, or pick them by using a rule - such as highest first (HIFO), oldest first (LIFO), etc. But once that rule is applied, what you're selling are specific shares. You can tell the broker to apply the rule of your choice, or you can apply it yourself (seeing which shares the rule picks, and telling the broker to sell those particular shares).
(*) There can be a variety of adjustments to cost. Perhaps the most well known is the wash sale rule. So by "what you paid for it", I mean the adjusted cost. What the broker reports is usually an unadjusted cost, and thus likely wrong if there were any adjustments to be made.
Comments
- Jaffe says that when dumping everything, cost basis method doesn't matter. It does, and is generally the only time I prefer average cost to specific shares. With average cost in a rising market, the short term shares' cost drops, and the long term shares' cost rises. That shifts short term gain into long term gain, which reduces your taxes.
- Generally, the default method doesn't matter if you're attentive, because you can override it when you sell. And if you're not attentive, you're not going to pay attention to this article anyway
- The time you have to change your mind is the settlement date, not the date of the sale. (For mutual funds, that can be the market close if you're dealing directly with the fund company, T+1 for most funds through brokers, or T+3 for some funds/brokers. You need to check for the particular fund.)
This whole thing is so much simpler than people (and the IRS) make it out to be. There are only two questions when selling shares: which shares were sold, and how much did those particular shares cost?
If you are using average cost, then you are selling FIFO - oldest first - there is no choice. And that's what you usually want, assuming there's a gain. That way, your gain shows up as long term gain, and you get taxed less.
If you're not using average cost, then the cost of each share is what you paid for it *. The only question is which shares are you selling. You can pick the shares yourself, one by one, or pick them by using a rule - such as highest first (HIFO), oldest first (LIFO), etc. But once that rule is applied, what you're selling are specific shares. You can tell the broker to apply the rule of your choice, or you can apply it yourself (seeing which shares the rule picks, and telling the broker to sell those particular shares).
(*) There can be a variety of adjustments to cost. Perhaps the most well known is the wash sale rule. So by "what you paid for it", I mean the adjusted cost. What the broker reports is usually an unadjusted cost, and thus likely wrong if there were any adjustments to be made.
Thank you for your efforts with this.
Regards,
Catch