Average cost method
How it works
The total cost of all the covered shares you bought is divided by the total number of covered shares you own, so all of your covered shares in a fund will have the same basis. Unless you select another method, in writing, this will be the method we use when you sell mutual fund shares. It will appear on your statement as AvgCost.
Vanguard also uses average cost to track the basis for noncovered shares. However, the basis of the shares is tracked separately from the basis of the covered shares. The noncovered shares will also generally be sold before the covered shares. Vanguard won't report the basis of noncovered shares to the IRS.
You can only use the average cost method for mutual funds and most ETFs (exchange-traded funds), and for stocks acquired as part of a dividend reinvestment plan on or after January 1, 2011.
Are you investing in something other than mutual funds?
Shares bought and sold after the regulatory changes took effect on January 1, 2012 (or January 1, 2011, for stocks).
Cost basis reporting for covered shares will be sent to both you and the IRS.
Shares bought before the regulatory changes took effect on January 1, 2012 (or January 1, 2011, for stocks).
Cost basis reporting for noncovered shares will be sent to you alone; it will not be sent to the IRS.
Why you might prefer the average cost method
It's easy to use
The average cost method is automated, so you won't have to choose which shares to sell. Your gains or losses are spread evenly across all the shares you own.
A few things to consider
All shares will have the same basis
Because your basis will be spread evenly across all the shares you own, you won't be able to select a specific set of shares to sell or transfer, which may limit some tax planning strategies.
You'll be locked in to this method until you change it in writing
Once you sell, transfer, or dispose of covered shares of a fund, you'll be locked in to the average cost method for:
- Any remaining shares of the fund held in your account.
- Any additional shares purchased before switching to another method.
This may make tax planning, such as gifting or charitable giving, less advantageous.
It could be less tax-efficient
If you're hoping to minimize your taxable gains—or maximize your tax losses to offset gains—this may not be your best choice. You'll have no control over the gains and losses realized on a sale or over the holding period between the purchase and sale of assets.
Changing to or from the average cost method
Changes into or out of average cost can't be made over the phone. But it's easy to make the change online.
Select a cost basis method
Select a cost basis method
This information isn't intended to be tax advice and can't be used to avoid any tax penalties. We recommend you consult a tax advisor.