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Understanding cost basis

What is cost basis?

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.

Why you need to calculate cost basis

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.

Timetable of cost basis legislation changes

January 1, 2011 January 1, 2012 January 1, 2013 (or later)
Stocks Mutual funds** Bonds
Certain ETFs* All ETFs Options
  Dividend reinvestment
plans (DRIPs)
Other securities

* 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.

What cost basis methods are available at Vanguard

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
Method Details
Average cost
Available for mutual funds and dividend reinvestment plans (DRIPs).
Calculates the average cost per share for each share you own.
Vanguard's default method for mutual funds.
First in, first out
Available for mutual funds, as well as stocks and ETFs held through Vanguard Brokerage Services®.
The first shares you acquired will be the first ones we sell.
Vanguard's default cost basis method for stocks and ETFs.
Specific identification
Available for mutual funds, as well as stocks and ETFs held through Vanguard Brokerage Services.
You choose the shares (or lots) to sell, which will determine your capital gains or losses.

Set your preferred cost basis method

Set a preferred cost basis
method for your mutual
fund accounts.

Get started.

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.

Important information if you have checkwriting or automated account options

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.

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