Thanks to the advice on this group, I have learned that index funds
are the way to go. So I invest my money into Spartan and Vanguard bond
Every few months I buy around $20k worth of shares. Will this create
some accounting nightmare when I sell, since I will have bought shares
at different points in time?
Homer Simpson writes:
Not really. Ultimately, when you sell, you'll (hopefully) have
capital gains, and you'll have to report those gains and pay
taxes on them. There are a couple of ways to calculate your
cost basis when you buy mutual funds, since there has always
been a presumption that folks buy mutual funds and then add
to their holdings either by buying additional shares or by
reinvesting distributions (which you don't have to do, but
most folks do anyway).
You can calculate basis by using an averaging method (once
you start using averaging, you need to keep using it), or
by first-in-first-out, or by specific share identification
when you sell. The last of these offers you the most control
over tax implications (ie. you can choose to sell in particular
the highest-cost shares and thus minimize taxes).
Bear in mind that if you have distributions reinvested, each
of those reinvestments is also a purchase - you pay taxes on
those distributions annually (you'll get a 1099), but the
reinvestment of those distributions increases the basis of
your position on the whole. Make sure you track this so you
don't pay cap gains taxes you don't owe!
For more details, see IRS pub 564:
Note further that the Emergency Economic Stabilization Act
(the bailout bill signed into law in Oct., 2008) included
rules requiring financial intermediaries to track and report
adjusted cost basis for investors. It's phased in over a
few years (different investments get covered at different
times to allow the brokerages time to work the systems out).
Starting in Jan 2011, they need to track and report basis
for stock transactions.
In Jan 2012, mutual funds and DRIPS.
In Jan 2013, bonds and options.
This won't help, necessarily, with shares you've already
purchased - it only covers shares purchased after those
That said, most brokerages are already tracking basis for
folks for things they bought and kept at that brokerage.
(Currently, as far as I know, none of them transmit basis
to a new brokerage if you transfer the shares in kind).
Certainly Vanguard and Fidelity do a pretty good job of
tracking basis for you. I recently sold some shares at
Fidelity that had various purchases and reinvestments over
the years and their basis calculation was within pennies
of my own.
Plain Bread alone for e-mail, thanks. The rest gets trashed.
Are you posting responses that are easy for others to follow?
That's amazing and wonderful to look forward to. Maybe I will even be
able to revoke my never-reinvest-dividends rule. In the meantime I
would caution the OP from many tiny automatic purchases from such
reinvestments, and just consolidate them manually and reinvest in
fewer chunks easier to track. Also beware how many bond types are
poised for interest rate risk