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How to preserve lot identifications moving to Average Cost Basis

jmpinternet

Running Quicken for Windows 2017 Premier. My brokerage (Vanguard) uses Average Cost Basis when selling fund shares but I've been recording the transactions as FIFO. In attempting to select Average Cost Basis I get the following advice message:

"When you switch to average cost, Quicken will discard lot identification associated with previous sales of this security. Click Help for more information INCLUDING HOW YOU CAN PRESERVE THIS (lot) INFORMATION" my emphasis.

Help falls through on this assertion. I need to know what steps to take to preserve lot information before I can process another Vanguard share sale. Can someone fill in this omission.

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q_lurker

You can't -- at least not directly. The Average Cost applies on a security basis to all transactions for that security over all time. If you just toggle that box on, all historical sales will switch to using average cost impacting realized gains on all prior sales in all accounts.

Before going on, I will point out that Vanguard will do by-lot specification for sales, if you tell them to. I do not know what their policy is on making a change from average cost to by lot.

I have a concept in mind that may be a reasonable work around, but I would like to think through it a bit more before going public with it. The gist will be to create a new security such that the old one would apply for prior historical sales and the new one would apply going forward. Give me a couple of days to cogitate on this.

jmpinternet

Thanks, Q.L, for your thoughtful response. The whole topic of cost basis is clearly more complex than one might expect Quicken designers to be experts in. I understand "by lot" (FIFO?) better than average cost but plan to quiz my broker on Vanguard's selection rationale for using average cost as the default. Meantime, thanks also for offering to delve into a way of retaining lot information that Quicken promised to deliver in their "Help" link. Meantime I may explore having my broker change from average cost, if the IRS will even ALLOW it on an investment previously sold on that basis.

q_lurker

You can't -- at least not directly. The Average Cost applies on a security basis to all transactions for that security over all time. If you just toggle that box on, all historical sales will switch to using average cost impacting realized gains on all prior sales in all accounts.

Before going on, I will point out that Vanguard will do by-lot specification for sales, if you tell them to. I do not know what their policy is on making a change from average cost to by lot.

I have a concept in mind that may be a reasonable work around, but I would like to think through it a bit more before going public with it. The gist will be to create a new security such that the old one would apply for prior historical sales and the new one would apply going forward. Give me a couple of days to cogitate on this.

As an example, here is how I might try to manage it. The particulars would be very user-dependent. In this case, I am wanting to work with VFINX (Vanguard's S&P 500 Index fund) which has been used for lot specific sale up to this point in time and I want to treat on an average cost basis going forward. That is, the historical transactions are OK, sales transactions after this date need to be treated differently.

A) Edit the existing security details. I'd alter the name of the fund (Vanguard S&P 500 Index BY LOT). I'd alter the ticker for the fund (VFINX-BL), and I'd unckeck that the fund is matched to an online security.

Note that those changes are now applicable for all accounts historically. Since the ticker won't match, quote updates via Quicken will not do anything. Since the online match is broken, downloads from Vanguard won't do anything to these holdings.

Create a new security. Ticker VFINX. Edit the name (Vanguard S&P 500 Index fund AVG COST), check the Average Cost box. If the opportunity pops up, do not match to Online security yet.

Now you want to convert or switch your current holding in the 'By Lot' security to the 'Average Cost' version. There are several ways you might accomplish that. I'll offer what I think may be the simplest.

C) Note the current cost basis for your current holding and the most recent acquisition date for that holding. In the applicable account, enter a Remove Shares for that current (By Lot) holding, all shares. Enter an Add Shares transaction for the Average Cost version of the security, same share quantity, same total cost basis, and most recent acquisition date.

D) Now you can let the match to online security take place. This should take place naturally with a download from Vanguard or (I think) you can force it through the Reconcile Shares function for the register.

The premise that i am operating on is that you have no need for the detailed quarterly dividend reinvestments you've made over the last X years; one composite lot with the total cost basis is adequate going forward. There are ways to convert those over by lot if really necessary or if you simply prefer that detail level. (Possibly MF Conversion or Corporate Acquisition macro-transactions.)

As noted before, I cannot vouch for this method either with respect to Quicken (I've never tried it), or to the IRS (can't say they'd allow it). You would also want to be careful in interpreting investment performance figures out of Quicken across that conversion date.

Hope that gives you some ideas.

Tom Young

I'd guess their rational is it takes less computer horsepower. You certainly can change cost methods with Vanguard:

https://investor.vanguard.com/taxes/cost-basis/methods

I'd think you could do the same with your broker.

jmpinternet

You can't -- at least not directly. The Average Cost applies on a security basis to all transactions for that security over all time. If you just toggle that box on, all historical sales will switch to using average cost impacting realized gains on all prior sales in all accounts.

Before going on, I will point out that Vanguard will do by-lot specification for sales, if you tell them to. I do not know what their policy is on making a change from average cost to by lot.

I have a concept in mind that may be a reasonable work around, but I would like to think through it a bit more before going public with it. The gist will be to create a new security such that the old one would apply for prior historical sales and the new one would apply going forward. Give me a couple of days to cogitate on this.

Thanks for your careful step-by-step; I need to experiment with this on a side copy of my Q/W data file. I presume that the intent is to retain all of the prior lot identifications and purchase prices in the "VFINX-BL" security, that the Remove transaction will retain them. Is that the case? I'll post what I find after experimenting.

q_lurker

You can't -- at least not directly. The Average Cost applies on a security basis to all transactions for that security over all time. If you just toggle that box on, all historical sales will switch to using average cost impacting realized gains on all prior sales in all accounts.

Before going on, I will point out that Vanguard will do by-lot specification for sales, if you tell them to. I do not know what their policy is on making a change from average cost to by lot.

I have a concept in mind that may be a reasonable work around, but I would like to think through it a bit more before going public with it. The gist will be to create a new security such that the old one would apply for prior historical sales and the new one would apply going forward. Give me a couple of days to cogitate on this.

I presume that the intent is ...

Correct. The transactions involving what is now tickered as VFINX-BL remain in your set of historical specific transactions. The Remove Shares is taking those assets out of your account as represented in Quicken as of a specific date. The Add Shares add in the equivalent shares in the form of the VFINX security set up for by average cost sales.

jmpinternet

You can't -- at least not directly. The Average Cost applies on a security basis to all transactions for that security over all time. If you just toggle that box on, all historical sales will switch to using average cost impacting realized gains on all prior sales in all accounts.

Before going on, I will point out that Vanguard will do by-lot specification for sales, if you tell them to. I do not know what their policy is on making a change from average cost to by lot.

I have a concept in mind that may be a reasonable work around, but I would like to think through it a bit more before going public with it. The gist will be to create a new security such that the old one would apply for prior historical sales and the new one would apply going forward. Give me a couple of days to cogitate on this.

Q.L. Again, thanks for your time. Based on what I've read about IRS rules a change away from average cost basis (ACB) cannot take place until all the holdings one acquired prior to the change to another basis are sold before the new method can be applied to new lots acquired. Based on this I think I'm stuck with ACB on the Vanguard securities. They declare this not so obviously in SELL statements; I should have been more observant.

My second "surprise" was how Quicken handles changing my holdings to ACB. They made known that ALL "BUY" lot information would be discarded with the change, FOR NO DISCERNIBLE REASON, but inferred that they would explain how to retain that info - hmm!

The procedure you described a few days ago would have to be repeated for each of 8 or 10 securities -- what a pain. The strategy I've decided to settle on for now is to maintain two *.QDF files, THE PRIMARY one named and modified to ACB sales, the other with a file name that includes "FIFO." I can download or enter sale transactions into each, only the latter of which will retain lot information. I'm used to kludges to work around Quicken anomalies.

q_lurker

You can't -- at least not directly. The Average Cost applies on a security basis to all transactions for that security over all time. If you just toggle that box on, all historical sales will switch to using average cost impacting realized gains on all prior sales in all accounts.

Before going on, I will point out that Vanguard will do by-lot specification for sales, if you tell them to. I do not know what their policy is on making a change from average cost to by lot.

I have a concept in mind that may be a reasonable work around, but I would like to think through it a bit more before going public with it. The gist will be to create a new security such that the old one would apply for prior historical sales and the new one would apply going forward. Give me a couple of days to cogitate on this.

My second "surprise" was how Quicken handles changing my holdings to ACB. They made known that ALL "BUY" lot information would be discarded with the change, FOR NO DISCERNIBLE REASON, but inferred that they would explain how to retain that info - hmm!

It appears you are referring to the pop-up warning that appears when you change that Use Average Cost check-box. "... Quicken will discard lot identifications associated with previous sales of this security."

I would consider that statement deceptive or unclear. As you are interpreting it, it is not accurate with respect to 2017 and prior yearly editions. I just confirmed that inaccuracy with my QW2017 edition. (I can't comment on QW2018.)

What they are actually saying is that if you had a previous sale of that security and for that sale, you specified specific lots to be sold, then by going to Average Cost, that previous specification of sold lots in that sale will be discarded. The Average Cost approach will use the lots on a FIFO basis and consider the cost of those lots to be the average of the possible lots.

What I see is that you can toggle the Use Average Cost checkbox on and off pretty much at will. All the buys are maintained in the database independent of each other. The check-box only affects the computation of the gain/loss data at any point in time. Each time you check or uncheck that box, all sales/remove transactions are affected as needed for current calculations. Gain/loss data is always (as far as I can tell) recomputed on demand. It is not stored.

Now that does not mean you can toggle that box arbitrarily. When you have had the box unchecked and recorded one or more sales of that security, then a capital gain/loss is computed. Presumably, that would match what you reported to the IRS for that sale. (I recognize not everyone relies on Quicken for such specifics.)

If you come back at a later date and check that box, your historical gain/loss will be recomputed by Quicken, and current or future sales will use that recomputed older gain/loss.

The reverse follows that same pattern if you start with the box checked and then uncheck it.

So I would NOT say that the by-lot data is discarded. All the by-lot data is available either way the box is checked.

That does not really mean that your need or desire to maintain two separate databases is unnecessary. The real question in my mind is what give you the best data for estimating cap gain/loss tax liability going forward.

HTH

jmpinternet

Thanks, Q.L, for your thoughtful response. The whole topic of cost basis is clearly more complex than one might expect Quicken designers to be experts in. I understand "by lot" (FIFO?) better than average cost but plan to quiz my broker on Vanguard's selection rationale for using average cost as the default. Meantime, thanks also for offering to delve into a way of retaining lot information that Quicken promised to deliver in their "Help" link. Meantime I may explore having my broker change from average cost, if the IRS will even ALLOW it on an investment previously sold on that basis.

An amendment to my last post. I agree that the pop-up rendered when you select Average Cost Basis (ACB), "... Quicken will discard lot identifications associated with previous sales of this security." is deceptive or unclear. What it discards is a presentation in "Holdings" of the lot computations generated from share transaction data. It must in fact retain that data and uses it to reconstruct the lot detail if you clear the ACB flag.

I made some cost basis comparisons for last year's sales and found that selecting ACB generated almost exactly the 1099-B data I filed with. It reduced my capital gains significantly, for at least THAT year. I'll stick with ACB, but still want to find again the IRS rules regarding switching away from it.

Final note - it appears that whichever cost basis I use, Quicken appears to record share sales in FIFO mode, which is what I think my brokerage does (waiting for an answer on this).

q_lurker

Thanks, Q.L, for your thoughtful response. The whole topic of cost basis is clearly more complex than one might expect Quicken designers to be experts in. I understand "by lot" (FIFO?) better than average cost but plan to quiz my broker on Vanguard's selection rationale for using average cost as the default. Meantime, thanks also for offering to delve into a way of retaining lot information that Quicken promised to deliver in their "Help" link. Meantime I may explore having my broker change from average cost, if the IRS will even ALLOW it on an investment previously sold on that basis.

Final note - it appears that whichever cost basis I use, Quicken appears to record share sales in FIFO mode, ...

True. But if you are operating under the lot specification setup, you have the option to choose other lots. Quicken will do the FIFO by default, but you can override that to best work within your specific current tax considerations.

No such option under the Average Cost basis approach. Quicken still chooses FIFO (oldest lots first) for the cap gains reports etc., but I know of no specific significance to that selection. There are no applicable tax options in play.

jmpinternet

Thanks, Q.L, for your thoughtful response. The whole topic of cost basis is clearly more complex than one might expect Quicken designers to be experts in. I understand "by lot" (FIFO?) better than average cost but plan to quiz my broker on Vanguard's selection rationale for using average cost as the default. Meantime, thanks also for offering to delve into a way of retaining lot information that Quicken promised to deliver in their "Help" link. Meantime I may explore having my broker change from average cost, if the IRS will even ALLOW it on an investment previously sold on that basis.

It turns out that selecting average cost basis can be a slippery slope, started with the 2011 IRS regulations regarding cost basis. . Shwabb states:

"There’s one major downside to using this method: If you choose it for
your first sale, you must continue to use that method for every
subsequent sale until you completely liquidate the holding."

Vanguard has it's own wrinkle, saying:

"If you sell, ... any shares in an account which is using average cost method, the new method you choose will only apply [to purchases made] from the date the method was changed going forward."

Net is you must dispose of all shares in your account that participated in computing average cost basis for sales. I discovered that I have not yet recorded a method so the brokerage simply applied their default method - "ACB". Oh, well.