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Selecting a cost basis method
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Covered and noncovered shares

Vanguard reports cost basis information to the IRS only for "covered shares," meaning those acquired and subsequently sold after the regulatory changes take effect.

For "noncovered shares"—those you acquired before the effective dates—Vanguard reports cost basis information only to you.

 

Timetable of cost basis legislation changes
Holding type Covered shares Noncovered shares
Stocks and certain ETFs* Shares acquired on or after January 1, 2011, and subsequently sold. Shares acquired before January 1, 2011, and subsequently sold.
Mutual funds** and ETFs*** Shares acquired on or after January 1, 2012, and subsequently sold. Shares acquired before January 1, 2012, and subsequently sold.
Simple debt and most options Debt and options acquired on or after January 1, 2014, and subsequently sold. Debt and options acquired before January 1, 2014, and subsequently sold.
Complex debts and options on certain complex debt.Debt and options acquired on or after January 1, 2016, and subsequently sold.Debt and options acquired before January 1, 2016, and subsequently sold.

*ETFs that are unit investment trusts (UITs) issued by regulated investment companies. If you're not sure whether this applies to your ETF, check with your issuer.

**Excluding money market funds.

***Certain ETFs, such as those that invest in commodities, aren't stocks; therefore, they're not covered under the regulations.

Generally, these are bonds or other debt obligations with fixed yield and maturity dates.

Generally, these are bonds or other debt obligations without fixed yield and maturity dates.


You remain responsible for reporting your cost basis information on Form 1040, Schedule D, for all shares sold, whether they're covered or noncovered. You should use your own records in addition to the cost basis information Vanguard provides you. For your covered shares, it's important that the information you report in column (e) of Form 8949 matches what Vanguard sends to the IRS on Form 1099-B.

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Average Cost (AvgCost)

How it works

If you use the average cost method, we'll add up the total cost of all the covered shares you acquired and divide it by the total number of covered shares you own. The average cost of your noncovered shares will be determined separately. Average cost is available only for regulated investment companies such as mutual funds and stocks acquired in connection with a dividend reinvestment plan acquired after December 31, 2010.

The majority of mutual fund companies report cost basis using the average cost method. Vanguard has historically reported cost basis to mutual fund investors using the average cost method. Although we now offer additional cost basis methods for mutual funds average cost is still Vanguard's default method for mutual funds.*

Note: Changes into or out of average cost must be made in writing. You can change your method by logging on to your account on vanguard.com or you can complete and mail our Cost Basis Method Election Form. Due to IRS regulations, we're unable to accept average cost changes by phone.

Why you might want to use average cost

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Simple to use. If your focus is on simplicity, the average cost method is easy to understand. It's automated, so you don't have to choose which shares to sell. Your gains or losses are spread evenly across all shares you own.
Less recordkeeping. You don't need to keep detailed records of all your share acquisitions and sales. Vanguard has complete average cost information for all mutual fund shares you own.

Things to consider before choosing average cost

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Less control. Since you're not choosing which shares to sell, your gains or losses are spread evenly across all shares you own. Note: Because Vanguard doesn't report cost basis to the IRS for your noncovered shares (those acquired before January 1, 2012), we'll calculate your cost basis for those shares separately from your covered shares (those acquired on or after January 1, 2012, which are subject to the new reporting requirement). When you sell shares, your noncovered shares will automatically be sold first. Learn about covered and noncovered shares.
May be less tax-efficient than other methods. This may not be the best choice if you're concerned about minimizing your taxable gains or maximizing tax losses to offset gains. You have no control over the gains or losses that are realized on a sale, or the holding period between the purchase and sale of assets.
*All other securities will default to first in, first out.
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First in, first out (FIFO)

How it works

If you choose the first in, first out (FIFO) method, which is available for all securities, we'll sell your oldest shares first. In other words, the first shares you acquired will be the first ones we sell. FIFO is also Vanguard's default method for all securities other than mutual funds.

Why you might want to use FIFO

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Simple to use. The principle behind FIFO—shares are sold in the same order they're acquired—is very easy to understand.
You can be hands-off. You don't need to choose which shares to sell; we'll automatically sell your oldest shares first.

Things to consider before choosing FIFO

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May be less tax-efficient than other methods. Because shares to be sold are selected automatically based on acquisition date, this method may not be the best choice if you're concerned about minimizing your taxable gains or maximizing tax losses to offset gains. You have no control over the gains or losses that are realized by a sale.
Gains and losses are market-dependent. If the value of your shares has appreciated significantly because of market gains, you could end up with a large gain. Conversely, if the market has gone down, you could end up with a substantial loss.
May require more detailed recordkeeping. You'll need to keep detailed records of your adjusted basis, including acquisitions and sales for mutual fund shares. Vanguard won't be reporting cost basis for these shares to the IRS. Please note that it's your responsibility to verify that all information reported to the IRS is correct. Learn about covered and noncovered shares.
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Specific identification (SpecID)

How it works

If you use the specific identification (SpecID) method, which is available for all securities, we'll sell the shares (or lots) you select at the time of the transaction.*

Note: If you intend to use SpecID as your preferred cost basis method for any mutual fund holdings, we encourage you to select this method before you make an online sale. Setting this method in advance may help avoid delays in your transaction, because it takes one day to make SpecID information available for mutual funds.

Why you might want to use specific identification

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More control. You get to choose the shares you want to sell for each transaction.
Potential for greater tax efficiency. Specific identification makes sense if you're concerned about minimizing taxes. Based on the shares you select, you can manage the gain or loss that is realized on sales from your account.

Things to consider before choosing specific identification

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Requires you to be hands-on. Unlike average cost and FIFO, this method isn't automated; you must choose the shares you want to sell. However, when you go to vanguard.com you can see the gain or loss for each lot, which may help you choose which ones to sell.
May require more detailed recordkeeping. You'll need to keep detailed records of your adjusted basis, including acquisitions and sales of mutual funds, most ETFS, and stocks. Vanguard won't be reporting cost basis for these shares to the IRS. Please note that it's your responsibility to verify that all information reported to the IRS is correct. Learn about covered and noncovered shares.


You remain responsible for reporting your cost basis information on Form 1040, Schedule D, for all shares sold, whether they're covered or noncovered. You should use your own records in addition to the cost basis information Vanguard provides you. For your covered shares, it's important that the information you report in column (e) of Form 8949 matches what Vanguard sends to the IRS on Form 1099-B.

*For tax purposes, you can use SpecID for all securities, however, Vanguard will only use average cost to recordkeep for noncovered mutual funds shares.

Cost basis methods available at Vanguard

Vanguard's default method for mutual funds is average cost. Our default method for stocks (held in a brokerage account) is first in, first out. We also offer specific identification for more "hands on" investors. Understanding the benefits and drawbacks of each could help you decide which method may best fit your investing style and tax situation.

Consider the pros and cons of each cost basis method
Method Pros Cons
Average cost (AvgCost)

Calculates the average cost per share for each share you own.
Learn more

Simple to use.
Less detailed recordkeeping.
Less control.
May be less tax-efficient than other methods.
First in, first out (FIFO)

The first shares you acquired will be the first ones we sell.
Learn more

Simple to use.
You can be hands-off.
May be less tax-efficient than other methods.
Gains and losses are market-dependent.
May require more detailed recordkeeping.
Specific identification (SpecID)

You choose which shares to sell.
Learn more

More control.
Potential for greater tax efficiency.
Requires you to be hands-on.
May require more detailed recordkeeping.

Set your preferred cost basis method

We encourage you to set your preferred method for shares you acquire in your nonretirement (taxable) Vanguard accounts. If you don't set a preferred method, and you try to sell shares that you acquired on or after the effective dates, you'll be required to pick a method before we can complete your transaction.

You'll have the flexibility to set or change your preferred method—for one fund or all funds within an account. Subject to certain limitations, you can change your preferred method for future sales, even if you've used average cost in the past. However, regulations stipulate that changes into or out of average cost must be made in writing or online. (We're unable to accept average cost changes by phone). The most convenient way to change your cost basis method is online at vanguard.com. Or, if you prefer, you can complete and mail our Cost Basis Method Election Form.

 
 
 
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