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Cost basis is calculated incorrectly when reinvesting mutual fund dividends

Bill Ferguson

When I receive a dividend from my mutual fund and it is reinvested in the fund, Quicken adds the reinvestment to my cost basis. This is incorrect.

Example - I invest $1000.00 in a mutual fund. This is my cost basis.
The fund pays a $50.00 dividend which is reinvested in the fund.
For simplicity sake, I now own $1050.00 of that fund
Quicken says my cost basis is $1050.00, but my investment was only $1000.00
My Fidelity statement agrees with my calculation, not with Quicken.

Is there a fix for this issue?

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Accepted answers

Sherlock

Cost basis is not the same as the amount invested. In your example, the amount invested in the mutual fund is $1000 and the cost basis is $1050. If you record the reinvested dividend as a dividend and a buy, the amount invested would also be $1050.

q_lurker

Bill Ferguson said:

...
Is there a fix for this issue?

There is not a "fix for this issue", because there is nothing broken. Quicken is doing it right and consistently across all accounts. I suspect Fidelity is doing it correctly in taxable account (as Quicken does it) and in a different manner in tax-deferred accounts (like 401ks and IRAs). Cost basis is not highly relevant in a tax deferred account, though I find it very useful. In this case, consistency is a virtue.

All comments

Sherlock

q_lurker

Bill Ferguson said:

...
Is there a fix for this issue?

Bill Ferguson

Thanks for the response. The investment is in my IRA. I understand that I received a dividend (received income), and then "spent" that money as a further investment into the fund, and my true investment basis is the original investment plus the reinvestment.
What I like to look at is how much my original investment has compounded and grown, so I will look at both the Quicken and Fidelity calculations, realizing they are two different (and correct) calculations.

Tom Young

"My Fidelity statement agrees with my calculation, not with Quicken."

Quicken accounts for cost basis as that term is used in under Generally Accepted Accounting Principals (GAAP) and to the best of my knowledge and belief all reputable financial institutions do likewise. So I certainly would expect Fidelity would have the correct cost basis for the security and that number would agree to Quicken.

However, there's also the issue of "statutory accounting" (e..g., "accounting" as defined by tax law), and there certainly can be big differences between statutory account and GAAP. So, for income tax purposes a traditional IRA is considered to have a "cost basis" equal to all non-deductible contributions made to the account. Is there any chance that Fidelity is using the IRS's definition of basis here, i.e., the initial $1,000 contribution? Even that notion is pretty far-fetched as how would Fidelity know that the contribution was non-deductible in the first place?

You may want to follow up with Fidelity about this.

NotACPA

Fidelity (I'm their client also) is inconsistent in the matter. If the ReinvDiv is in a Taxable account ... they add the $ to your cost basis. Which is correct.

If the ReinvDiv is in a tax-advantaged account, they don't ... which is incorrect.

A ReinvDiv is, in concept, no different than if they had sent you a check and you returned it with a request to "buy more". In both cases, you're adding money to what you have already paid for the fund in order to acquire more shares.

Fidelity claims that because there's no CapGains inside the tax-advantaged account that there's no purpose of "adding to the cost basis". While that might be true, not adding to the cost basis totally screws up any performance reporting on that security.

Say that you sold that original $1000 of funds, leaving the $50. So NOW, the funds bought with the $50 would have a cost basis of $0 ... and a performance return of (who knows what, it involves dividing by Zero).

Tom Young

But they do add "outside" money to the basis figure? That, easily, could cause mistakes on the tax side.

Chuck Pritchard

RE: Investment Cost Basis Problem: We just transferred from TD Ameritrade to Schwab and when I transferred all transactions in TDA to Schwab in Quicken, one of the 10 stock funds ended up not coming over properly. The number of shares are correct but the basis isn't right. Any tricks to updating only the cost basis?

Thanks ... Chuck Pritchard Texas

Tom Young

@Chuck Pritchard

Typically you wouldn't transfer transactions from one Account to another Account. Instead you'd use the "Shares Transferred Between Accounts" action. That would create a Remove action for each security in the "from" Account and a series of Add actions in the "to" Account, one for each lot of each security.

If you just did this transfer of transactions, you might try restoring from a backup just before you did this and try the "Shares Transferred" action instead to see if that works.

Otherwise you might rename a backup that has all the transactions for that one security, open the backup, print out an Investment Transactions for that one security, and see if you can spot what's wrong by comparing that report to what you're seeing in the new Account.

Chuck Pritchard

Tom:

Thanks for the quick reply! I actually used Quicken to "Shares Transferred between Accounts" to move all shares from TD Ameritrade to Schwab. Just one account cost basis didn't match. So just need a way to correct the Cost Basis. Not sure how I'd correct the cost basis. Any suggestions? Thanks ... Chuck

Tom Young

Well, first you have to figure out where the error is.

First thing to do I'd think is to look at the lot detail for that security in the "just before transfer" backup file and then compare that to the "just after transfer" file to see if the difference comes down to one particular lot. If that happens to be the case then I'd think you could delete the "Added" action for that lot in the current file and then create your own, correct, "Added" transaction to get things right.

I'm still puzzled, though, that there's a problem here. Maybe another thing to try is to force a recalculation of transactions in the "just before transfer" file by doing a {CTRL}-Z keypress in the relevant Account to see if there's some hidden mistake and the "before transfer" cost numbers change, maybe to the numbers that got transferred over?

Any placeholders anywhere in either the old file or the new file? (Edit > Preferences > Investment transactions > tick "Show hidden transactions")

Does the financial institution holding the Account have good cost date information to ensure that you have the right number in the first place?

Chuck Pritchard

Tom:

Thanks again for the quick reply!

I'll have to get back with you in the next few days ... have a pretty full schedule.

At first glance going to be a little hard as I have put off addressing this for 3 + months and have a lot of activity entered for that period so it would affect the work I've done in the interim.

I'll study & see if I can find a solution early next week & let you know.

Thanks again ... Chuck

Tom Young

"have a lot of activity entered for that period so it would affect the work I've done in the interim."

If you have saved backup for the "just before" and "just after" days I'd just deal with those two files to figure out the problem and determine how to fix it. Once you've got that in hand just open your current file and make the fix or fixes as an historical entry.

Chuck Pritchard

Tom:

What/how do you do a "historical entry"? I just need to update the "cost basis" to the amount that shows on my Schwab statement.

Thanks,

Chuck

Jim_Harman

Normally Quicken tracks all your purchases and sales, so it remembers the cost basis for each tax lot. To change the cost basis for a lot, you would go back the the Bought entry for that lot and correct the data there. You might also need to go to any partial Sold transactions and make the tax lots sold match your broker's data.

Chuck Pritchard

Tom:

I'll check with Schwab support and see if they can help straighten out this out.

Thanks for all your help and I'll let you know when/if I've found a solution.

Chuck

Eric Pilhofer

To the original question, I understand where you are coming from, my Prudential does the same. You can always trick the system and just "Add Shares" and keep your cost basis the same. If you also want to track dividends you can create a dividend account in the Hidden Accounts section. (which does not count towards your net worth)

q_lurker

@Eric Pilhofer
The original poster acknowledged the correctness of the Quicken calculation and the difference from Fidelity.

so I will look at both the Quicken and Fidelity calculations, realizing they are two different (and correct) calculations.

To "trick the system" of Quicken is rarely a good idea in my experience.

prtct&dfnd

I had this same issue. I disagree that the cost basis should be updated because the trading firm I use does not do that. So this is the way I worked around the issue to make everything correct.
1. For the dividend deposit transaction, I categorized the transaction as "Reinvest Dividend" for 0 shares and the full dollar amount of the deposit.
2. For the purchase of the new shares transaction, I categorized the transaction as "Reinvest Dividend" for the purchased shares and for $0.

This makes everything look correct for the cost basis, the shares total and the cash in account. Using the "Reinvest Dividend" category keeps both transactions on the investment side with no effect on the cash side. In the portfolio tab, it will essentially add a transaction for the number of purchased with a market value of $0.

Pennypincher

@prtct&;dfnd
Are you still using this strategy? It seems like it would solve the issue, but I can't force Quicken to accept a Reinvest Dividend transaction with 0 shares. Wondering how you're managing to make this work or if there's been a change in the program that now blocks this. Thanks!

JeffreyBowles

I think that the fundamental question here is one that has bothered me for a long time. But perhaps, I can phrase it a little differently.

I am a government employee. I have a TSP account. I put money into the account and I occasionally move it between investments. I believe it is a similar situation to have a IRA/SIMPLE, etc. At some point, I will pay tax on the entirety of the withdrawn amount.

I would contend that the only meaningful "cost basis" in this situation is the amount of money being put into the account. When I move money between funds, Quicken, as I have set it up, calculates a new cost basis in the newly acquired asset. But that doesn't impact that tax situation as it would in a taxable account. Quicken's cost basis for my TSP account is almost 3 times the amount of money deposited. The way quicken determines performance appears to be impacted by the cost basis. My return on investment is very much incorrect.

So, the question is, is there a way to make only the money put into the account control the cost basis and not have a continual recalculation of the cost basis. Really need a way to move money between investments that doesn't have any tax ramifications. Perhaps, using the "add" and "remove" shares would be better here - has anyone done it this way? Adding seems ok, removing doesn't.

Tom Young

"I would contend that the only meaningful "cost basis" in this situation is the amount of money being put into the account"

Well, that's one way of looking at the situation, but it's not necessarily the "most meaningful." If I told you "I made an investment of $100 and took out $2,000," there's really no way to access if that's a "good deal!" or not. If I added to that statement "3 weeks later" you'd say "WOW", if I added "20 years later" you might also say "wow", but in an entirely different tone of voice.

"Quickens cost basis for my TSP account is almost 3 times the amount of money deposited. The way quicken determines performance appears to be impacted by the cost basis. My return on investment is very much incorrect."

Not entirely sure why cost basis is being changed when you move funds (securities, presumably) but a simple transfer of shares between deferred tax Accounts shouldn't change the basis, and the Quicken wizard for the transfer of shares does use the Remove and Add actions. But an IRR report that only includes those three Accounts and really only looks at cash movement "across the border" surrounding those 3 Accounts should provide an accurate assessment of "money in and money out" and "time."