Average cost method
This method is typically used to calculate the cost basis for mutual funds.
How it works
We'll add up the total cost of all the covered shares you bought and divide it by the total number of covered shares you own. Unless you select another method, this will be the method we use automatically when you sell mutual fund shares. It will appear on your statement as AvgCost.
Keep in mind: Vanguard doesn't report cost basis to the IRS for noncovered shares, so those calculations will be prepared and reported separately. When you sell shares, your noncovered shares will automatically be sold first.
You can only use the average cost method for mutual funds (which are regulated investment companies) and for stocks and eligible exchange-traded funds (ETFs) that were bought as part of a dividend reinvestment plan after December 31, 2010.
Are you investing in something other than mutual funds?
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.
It involves less recordkeeping
You won't need to keep detailed records of all the shares you buy and sell. Vanguard has complete average cost information for all the mutual fund shares you own.
A few things to consider
You'll have less control
Because your gains and losses will be spread evenly across all the shares you own, you won't be able to hand-select which shares to sell.
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.
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.