Cost basis is, generally, the price you paid for your shares. This includes adjustments such as reinvested dividends and capital gains, as well as any sales commissions or transaction fees.
Keeping track of your cost basis is an important step in determining your capital gains or losses on sales of shares. The IRS requires you to report your gains or losses for shares sold when you file your annual tax return.
Because of regulatory changes, which are being phased in through 2013, investment companies such as Vanguard will have to report cost basis for sales in taxable (nonretirement) accounts to the IRS as well as to you. Previously we reported this information only to you. The table below lists the effective dates for the different types of securities that are covered by the new IRS rules. If you acquire shares after the effective date and subsequently sell them, your cost basis will be reported to the IRS as well as to you.
|January 1, 2011||January 1, 2012||January 1, 2013 (or later)|
|Certain ETFs*||All ETFs||Options|
* 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.
The cost basis method you use can affect the capital gains or losses when you sell shares. In turn, it can also influence how much you owe in federal taxes. Therefore, it's important to give thoughtful consideration to your tax situation when choosing a method.
|Vanguard's cost basis methods|
|First in, first out
Set a preferred cost basis
method for your mutual
You're now able to set a preferred method for each of your mutual fund accounts by choosing from Vanguard's expanded cost basis services. Establishing your preferred method ahead of time will make it easier when you go to sell shares.
Since we'll already know which method you want to use, we won't have to ask you to choose a method during a sale. You'll also have the flexibility to change your preferred method.
If you have automatic withdrawals or exchanges set up for a Vanguard stock or bond fund, or the checkwriting option for a bond fund, it's wise to set a preferred cost basis method for that fund in advance. This way, when automated sales are processed, we'll know which cost basis method you want to use. Otherwise, Vanguard will apply average cost as the default method for the shares sold. Once shares are sold, you can't change the method that was used for that transaction. You can choose a different method for future sales though, subject to certain limitations.