Vanguard provides gain and loss information where the cost basis is determined using the average cost single category method. The mutual fund pays monthly dividends, so any redemption that results in a loss is generally a wash sale. I've been trying to reconcile these figures with my understanding of wash sales and the average cost method. I've been able to reproduce Vanguard's numbers for years prior to 2006 for the most part. There seems to be the infrequent discrepancies, typically only one or two cents, which I attribute to rounding errors. But in 2006, there was a fair amount of activity in this account, and I don't understand how Vanguard came up with some of its numbers. My first question concerns a relatively simple case of multiple redemptions. I just want to make sure I understand the basics. Consider this situation:
12/31 Reinvested dividend for 10 shares. 1/31 Reinvested dividend for 10 shares. 2/15 Redemption of 50 shares results in a loss. 2/28 Reinvested dividend for 7.5 shares. 3/15 Redemption of 50 shares results in a loss. 3/31 Reinvested dividend for 5 shares.Here's my understanding of how it's supposed to work: The first redemption is a wash sale because of the dividends reinvested on 1/31 and 2/28. The disallowed loss is (10+7.5)/505% of the loss realized on the sale. The second redemption is a wash sale because of the dividends reinvested on 3/31, but not 2/28, so the disallowed loss is
5/50% of the loss realized on that sale. The shares purchased on 2/28 don't contribute to the disallowed loss, even though they are in the 61-day window, because they were used in calculating the disallowed loss on the first redemption. Is my explanation correct? If not, how does it work? My second question is, how do I calculate the cost basis of a redemption if purchases occurs on the same day? In my particular case, a mandatory IRA distribution and reinvested dividends resulted in purchases the same day a check on the account cleared. Do I just treat the transactions as completely independent or do I have to do some sort of averaging? I suspect the latter because treating them independently results in figures that don't match what Vanguard came up with, regardless of which order I process the transactions. (Of course, Vanguard could be wrong, too.) Thanks for any help.