Cost basis methods available at Vanguard
Weigh the pros and cons of each calculation method to pick one that best fits your investing style and tax situation.
When we calculate cost basis for your Vanguard investments, we'll automatically use "average cost" for mutual funds and "first in, first out" for individual stocks. But you can change those settings—or use "specific identification" if you're more of a hands-on investor.
Here are some details to help you understand the pros and cons of each method.
Cost basis methods
Easy to use. This method averages the purchase price of your shares and bases the holding period on the earliest date the shares were acquired.
You must elect out of or into this method in writing. Upon the sale, transfer, or disposition of covered shares, you’ll be locked into the average cost method until you change it in writing. This may make certain tax planning, such as gifting or charitable giving, less advantageous. In limited circumstances, long-term gains or losses may be converted to short-term.
Provides the most flexibility for tax planning strategies.
Requires more effort: Generally you must specify the shares to be sold or transferred before the settlement date and Vanguard must confirm those specifications back to you within a reasonable time.
Easy to use. Sells first the shares for which we don't know the acquisition date, followed by the shares with the earliest acquisition date.
Sales and transfers are based on acquisition date and don't consider potential gains or losses.
Maximizes losses and minimizes gains for tax purposes.
Doesn't consider holding period. May recognize short-term gains before long-term gains.
Set your preferred cost basis method
It's best to set your cost basis method immediately after you buy or acquire shares of a new investment. If you don't, when you sell shares of that investment, you'll have to pick a method before you can complete the transaction.
Even if you've already selected—and even used—one of these cost basis calculation methods, you can change it for future sales whenever you want.* And you can apply those changes to just one fund or to all the funds within an account. However, your new method will not automatically apply to any new investments that are added at a later time.
Changes to or from the average cost method can't be accepted by phone.
A special note about bonds
We offer four accounting methods:
- Amortize bond premium.
- Include accrued market discount.
- Accrue market discount based on a ratable (straight-line) method.
- Translate interest income and expense at the spot rate.
You can select your method anytime during the calendar year and have it applied retroactively.
To select your accounting method, you must first request the appropriate form by calling us at 800-669-0514.
Once you've completed the form, mail it back by December 31 of the year for which the selections are made if you want those selections to be considered when Vanguard prepares your IRS Form 1099.