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Fix Mutual Fund Conversion so cost basis is correct if holding is set to "Use Average Cost"

Jim_Harman

As reported here
https://community.quicken.com/discussion/7858412/mutual-fund-conversion-erroneous-cost-basis

and elsewhere, the Mutual Fund conversion function is broken if there is more than one tax lot in the original holding and the security is set to "Use average cost".

In QWin Subscription R22.12, I tried a mutual fund conversion on a test file and found the following:

-- If the current holding IS NOT set to "Use average cost" the conversion works correctly and preserves the original cost basis of each lot and thus the total cost basis.

-- If the current holding IS set to "Use average cost" the market value for the new holding is computed correctly but the cost basis is incorrect. As @tapeterson reports above, it sets the cost basis for EACH LOT of the new holding to the TOTAL cost basis of the original holding. In my test case there were 15 lots, so the total cost basis after conversion is 15 TIMES what it should be.

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q_lurker

I would like to caution about this topic.

As I understand current operation:
a) Use Average Cost generally operates as a toggle. You can check it or uncheck it at will. The consequence is on how the the Cap Gains report is calculated and ow the cost basis per lot is shown. (See point c).
b) Considering a partial sale of a holding set for average cost, the program still sells the shares based on a FIFO scheme. That is, the program 'sells' the first shares bought even though it is using an average cost basis for the cap-gain determination. (Not a problem)
c) When Use Average Cost is selected, the program does NOT display the cost basis of the individual lots; it only displays the basis for the entire holding. (Not a problem)
d) When a macro-transaction has been entered that uses the Remove Shares / Add Shares pairing, the Add Shares use the original cost of each lot being added. The same entries are created without regard to the Average Cost selection. (I tested this with the Shares Transferred function, but I believe it also applies to MF Conversion, Stock Spinoff, and Corporate Acquisition transactions that operate similarly.)
e) With the Remove Shares / Add Shares pairings, there is not dynamic relationship between the two. By that I mean that subsequent changes to either part are not reflected in the other part. The user can edit shares or values for a Remove or an Add and not have the other value automatically change to remain compatible.

Now the conundrum (at least for me) predicated on cases where there has been a partial sale of the holding while Average Cost applied. :

As is, the cost basis transferred is the raw cost basis determined as if Average Cost basis had not been involved. Those values will be wrong for future average cost based sales. But if instead the Add Shares transactions are changed to instead reflect the average what the entire holding had once been, then the ability to toggle the average cost use on and off gets broken.

Further cautions: I don't know what the IRS rules on these types of situations. What is the appropriate process if converting from MF1 to MF 2 and MF1 was a Use Average Cost setting and MF 2 is not? Or vice versa. Are there any circumstances where a Spinoff operation might apply (none I am aware of)?

All in all, I have no personal use for a Use Average Cost selection. I use Quicken specifically to be able to select the most tax-advantageous lots to sell.

Any changes in this area should be fully thought out with limitations and expectations fully explained to the user.

Jim_Harman

@q_lurker,
What I see in my test file using QWin Subscription R22.12 and others have reported indicates that your analysis in d) is incorrect for the Mutual Fund Conversion macro transaction if the old fund has been set to Use Average Cost.

As I describe above, it incorrectly computes the cost basis of EACH LOT of the new holding as the TOTAL cost basis for the original security, so if there are 10 underlying lots in the original holding, the resulting cost basis will be 10 TIMES what it should be. Try it in a test file and you will see the problem.

q_lurker

@Jim_Harman: I am not disputing that at all. I am trying to point out a more underlying question. In essence, What values should Quicken be inserting into the Add Share transactions for ANY of those style events (Corp Spinoff, Corp Acquisition, MF Conversion, or Shares Transferred)?

Suppose you
a) bought 10 shares for $10/share ($100)
b) bought an additional 10 shares for $15/share ($150)
Your average cost per share is $12.50
c) sold 5 shares
Now (by Quicken's current methods) you have 5 shares from lot 1 and 10 shares from lot 2 with a total basis of $12.50 * 15 = $187.50.

For any of those events, is the lot 1 holding supposed to come through with a cost basis of 12.50 * 5 = $62.50 with $12.50 * 10 = $125 for lot 2? Or should the lot 1 shares carry over their original basis of $10/share ($50 total) with $15/share ($150 total) for lot 2 with the average cost basis to be worked out later by some magic? I think the first applies, though it still seems 'strange' to me.

But any answer seems to violate the pre-existing principle that "Use average cost" is a toggle that can be done or undone at the whim of the user (notwithstanding any IRS related risks of doing so). Maybe that principle only exists in my mind.

I am asking that as Quicken tries to address the fix for the MF conversion, they also address the bigger picture as it relates to the other variations - or at least be aware of it.

Jim_Harman

I think Quicken's average cost basis calculation should agree with the IRS rules as described on pp 44-45 of Pub. 550
https://www.irs.gov/pub/irs-pdf/p550.pdf

The cost basis should not change after there has been a Mutual Fund Conversion.

q_lurker

Jim_Harman said:

I think Quicken's average cost basis calculation should agree with the IRS rules as described on pp 44-45 of Pub. 550
https://www.irs.gov/pub/irs-pdf/p550.pdf

The cost basis should not change after there has been a Mutual Fund Conversion.

From that publication I note:

Avg Cost Basis now can also apply to DRP holdings (but not the the shares you might hold of the same company outside of the DRP).
You can elect to use Avg Cost basis and not use avg cost basis at different time. "You can make the election to use the average basis method at any time. The election will be effective for sales or other dispositions of stocks that occur after you notify the custodian or agent of your election. "
You can revoke the election to use average cost basis.

I did not choose to follow through the IRS examples at this time, but those are significant differences from the way Quicken has operated. Further, Quicken might find itself in the position of maintaining one set of rules (the old set) for older transactions and new rules for newer transactions.

I foresee headaches.

jshayes01

In checking the setting for the converted fund (Index), it is NOT set to average cost.

jshayes01

In addition, the Quicken Escalation Team (they receive any submitted CEO Feedback / Complaints) has been working on the problem for almost 6-months with no identifiable progress. They initially stated they believed the problem to be in the Vanguard download. I created a test file and downloaded 18-months transactions from Vanguard. All downloaded correctly. [removed - rant/off-topic]

Craig Collins

Letting the community know that as of Jan 28, 2020, Build 27.1.24.11. this bug is still not fixed. The cost basis and hence average cost per share will NOT be correct in the following circumstance:

Share Purchase #1 in Account A
Share Purchase #2 in Account A
Partial Sale of shares in Account A -- still leaving some shares of Lot #1.
Share Purchase #3 in Account A
Conversion (shares removed from A and added to B via Quicken's Shares Transferred Between Accounts transaction)
Share Purchase #4 in Account B
All shares sold in Account B.

At the final sale, Quicken figures the average cost basis correctly on all lots except #1.

Jim_Harman

@Craig Collins in your example is the security set to Use average cost in the security details?

zkaps

As of 4/6/2022, this problem continues to exist in Quicken. I converted a MF's class A shares to class I shares, the MF's "Use Average Cost" was checked and the resulting total cost basis of the MF was its correct cost basis x the number of tax lots, which is grossly incorrect. Per Jim_Harman's suggestion, I unchecked "Use Average Cost" and then converted the MF. This resulted in the new fund having the correct cost basis. Afterwards, I checked "Use Average Cost" in the new fund. Until I saw the original posting here, I did not realize this problem was identified so long ago. I think it's about time it gets fixed.