Cost Basis Issue with Fidelity ETFs

jfclague
jfclague Member ✭✭✭✭
I am having an issue with cost basis with some of my Fidelity ETFs. The issue seems to happen when I receive a dividend reinvestment. As shown below, Fidelity doesn't increase the cost basis when I receive a dividend. 

Is there a way to adjust the cost basis so I can agree with Fidelity's cost basis?


Fidelity Cost Basis:


Quicken Cost Basis:

Answers

  • Sherlock
    Sherlock SuperUser ✭✭✭✭✭
    edited April 24
    If the holding is in a tax deferred account, Fidelity may have chosen not to track the correct cost basis.  If you wish to mimic this falsehood, you may edit the transaction.  If the purchase was a reinvestment, set the amount to zero otherwise set the price to zero and the total cost for the lot should calculate as zero. 
  • NotACPA
    NotACPA SuperUser, Windows Beta Beta
    Fidelity is inconsistent in this matter.
    I own the same stock in both my taxable account and my retirement account.  I reinvest dividends in both.
    In the taxable account, Fidelity adds the dividend to the Cost Basis that they show. They add $0 to the cost basis in the retirement account.
    I've complained to Fidelity about this (and I'm a customer of their "Private Client Group") for years ... and each time I'm told that the retirement account doesn't need to track cost basis for tax purposes.
    When I point out that the cost basis IS NEEDED for performance tracking, they go quiet.  But nothing gets fixed.
    Q user since DOS version 5
    Now running Quicken Windows Subscription,  Home & Business
    Retired "Certified Information Systems Auditor" & Bank Audit VP
  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    It looks like the entries in Quicken are correct  - the reinvestment on 12/18/20 purchased 1.68 shares @ 111 for a total of 186.48 but at Fidelity the cost basis for the reinvestment is zero.

    Do you really want to force Quicken's data to match Fidelity's apparently incorrect data? If so you could edit the reinvestment in Quicken so the total price for the reinvestment is $0.00.
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  • ElPope
    ElPope Member ✭✭
    I don't know you guys are saying Fidelity is wrong... they're right that you don't have to track the cost basis of reinvestments in a retirement account, and for performance tracking, you want the cost basis of reinvestments to be $0.
  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    edited May 15
    @ElPope

    In any account, a reinvestment is equivalent to receiving the distribution in cash in the account and using the cash to buy more shares.

    The cost of the purchased shares should be the amount of the distribution, not zero. If you set it to zero, your performance as shown on the Investment Performance Report will be overstated.
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  • ElPope
    ElPope Member ✭✭
    @Jim_Harman So if I buy $1,000 of XYZ at $1/share at the beginning of the year and at the end of the year the price is still $1 but XYZ issues a dividend of ten cents a share that I reinvest, I'll have a portfolio worth $1,100 with a cost basis of $1,100. According to Q my "performance" is 0%, which is obviously not true.

    Btw, I'm not saying the cost of the purchased (reinvested) shares should be zero, I'm only saying that cost should not be included in the cost basis for the security when evaluating performance. You need the actual cost for tax purposes.

    Also, I dispute your definition of "reinvestment" being equivalent to taking the cash and buying more XYZ. When you take the cash it basically becomes fungible and is indistinguishable from any other source of money to buy more XYZ. Reinvestment is a form of compounding. That's why in the Q register "ReinvDiv" is a different transaction type than "Div" and "Bought". "Bought" transactions should be included in the cost basis; "ReinvDiv" should not.
  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    edited May 15
    There are many ways to measure investment performance. The most reliable one in Quicken is what the Investment Performance Report uses, which is an Internal Rate of Return or IRR. The IRR is the annual interest rate a bank account with daily compounding would have to earn to have the same gain or loss over the time period, given the same deposits and withdrawals.

    [corrected]
    In your example, the portfolio started the year with a value of $1,000 and ended with $1,100. Its IRR is 9.97%, a little less than 10% because of the daily compounding.

    The IRR calculation is the same regardless of whether the security paid a dividend of $100 and you used the money to buy more shares, or the $100 dividend was reinvested, or there was no dividend and the share price went from $1.00 to $1.10.

    If there was no dividend, the share price remained at $1.00, and you made an additional investment of $100 during the year, then the closing balance would be $1,100 but the IRR would be 0%. All the gain was due to the additional money you added from the outside.

    I suggest you try your example on a test file in Quicken with the Investment Performance report, and/or in Excel's XIRR function, which performs an equivalent IRR calculation. Note if using XIRR for a full year, you should set the starting date to 12/31 of the previous year. 

    You may prefer a different performance measure. That is not right or wrong, it's just different.


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  • ElPope
    ElPope Member ✭✭
    The OP was complaining about the Holdings screen in Quicken, not the Investment Performance report, which by the way is also screwed up. For example, you get a different IRR depending on whether you set the end date to today or the end of the year; the report assumes the price on 12/31 is same as it is today. I guess that's okay as long as you're aware of it, but IMO the report should calculate using an end date of the greater of today or the date of the last transaction (which could be in the future if you're playing "what-if"). It does a similar thing if you set the start date to a time in the distant past before your initial purchase.

    Btw, the Investment Performance report does correctly omit the "cost" of Reinvestment transactions when computing the IRR. That is not the case for the "Gain/Loss" and "Gain/Loss (%)" columns on the Holdings screen, which I think is the OP's complaint (and mine).

    Investment Performance is not the only report that is wrong. The Account Balances report is wildly inaccurate. That may be because I have problem transactions in my DB, which has records going back to at least 1995 and perhaps earlier :)
  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    I would not say that the IPR is wrong.

    The reason the IPR shows different results for example YTD and Jan1 - Dec 31 of the current year is that it is an annualized rate of return. If you set the period to YTD and it is up 10% so far, about 1/3 of the way through the year, it assumes the performance will continue to go up at the same rate as it has so far, so it will show a 30% or so IRR. If you set the period to Yearly and current year, the assumption is that the price will remain constant for the rest of the year. You can pick the assumption you think is most useful for your investments.

    I agree that some of Quicken's other performance measurements are confusing? not very useful? wrong? - take your pick. The lesson is that you must understand the underlying assumptions and calculations to decide whether the numbers are meaningful to you. 

    The OP's original issue was with cost basis. We have strayed pretty far afield from that discussion. You should start a separate discussion if you want help untangling your Account Balances report.
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  • ElPope
    ElPope Member ✭✭
    Thanks Jim, yeah sorry I'm straying from the main topic, LOL. I have a love/hate relationship with this product. I think we agree the user has to be aware of how the reports and calculators work and not necessarily take what they see at face value. Cheers.
  • q_lurker
    q_lurker SuperUser ✭✭✭✭✭
    @ElPope You are right that the OP was complaining about the Holdings view, but he was also just complaining about Cost Basis on that Holding view.  You extended the conversation to performance with no reference to what 'performance' you meant.  Gain/Loss is only one component of overall performance.

    Fidelity chooses to not consider reinvestments as altering cost basis in a retirement account while they do consider that alteration in a non-retirement account.  Quicken chooses to treat the transaction the same regardless of the account type.  In my financial world-view, Quicken is right and Fidelity is wrong in how cost basis is treated for reinvestments in retirement accounts.
    Btw, the Investment Performance report does correctly omit the "cost" of Reinvestment transactions when computing the IRR.
    I would phrase that as Quicken considering both sides of the reinvestment - that it is both a return and an investment on the same date for the same amount.  If one chooses to treat the reinvestment as a Div and a Buy, both such transactions will appear in the report and the balancing effect of the two is more evident.  If you choose to say Quicken is ignoring the 'Cost", you must likewise choose to say they are ignoring the dividend. I suggest they are ignoring neither. 

    That you do not understand the Investment Performance Report and its underlying assumptions or that you would make different assumptions does not mean the report is "screwed up".  It is computing exactly what it proffers to compute.   
  • ElPope
    ElPope Member ✭✭
    @q_lurker Yes, "screwed up" is the wrong term. "Misleading" might have been better.

    I don't think Fidelity is right or wrong when it comes to the zero cost basis for retirement accounts. I think they've judged that the cost basis of a reinvestment is not relevant and therefore they leave it out to prevent confusion. Which obviously has the opposite effect on some people.

    I experimented with the Investment Report by running it once with a dividend as a ReinvDiv and again as a Div and a Bought. The Average Annual Return was the same (although that could have been because of the short 15-month duration and low dividend amount I used) In the latter scenario, it added the dividend amount to both the Investments and Returns column, which in my opinion is misleading and may lead to inaccurate results if the timeline and amounts are big enough. In the case of the ReinvDiv it left that transaction off the report entirely, and its only reflected in the End Market Value.
  • Rocket J Squirrel
    Rocket J Squirrel SuperUser, Windows Beta ✭✭✭✭✭
    edited May 15
    ElPope said:
    for performance tracking, you want the cost basis of reinvestments to be $0.
    No, you don't. The cost basis of reinvestments is the actual cost of the shares purchased through reinvestment. In a taxable account, you want the cost basis to increase; then you eventually pay less tax on the smaller capital gain when you sell.
    ElPope said:
    Also, I dispute your definition of "reinvestment" being equivalent to taking the cash and buying more XYZ. When you take the cash it basically becomes fungible and is indistinguishable from any other source of money to buy more XYZ. Reinvestment is a form of compounding. That's why in the Q register "ReinvDiv" is a different transaction type than "Div" and "Bought". "Bought" transactions should be included in the cost basis; "ReinvDiv" should not.
    Not exactly. In Quicken, "Reinv" transactions do correctly increase Cost Basis. They do not increase Amount Invested. Notice the use of capital letters; these are specific technical terms in Quicken. The difference between ReinvDiv and Div+Buy is reflected in Amount Invested. Cost basis is the same in both cases, which is correct for tax purposes.
    This has been discussed ad infinitum. In Quicken, Amount Invested is used to calculate some Returns. Cost Basis is used to calculate Gains & Losses.
    Quicken user since version 2 for DOS, now using QWin Premier Subscription on Win10 Pro.
  • ElPope
    ElPope Member ✭✭
    @Rocket J Squirrel I understand needing the *transactions* cost basis for tax purposes, but you don't include reinvestments in the cost basis when evaluating performance of your investment in a *security*. Quicken's Holdings screen portrays an inaccurate accounting of the cost basis, gain/loss and gain/loss % at the security level (not the transaction level). It just does, there's nothing really even to argue about here. I'm looking at it right now and it is inaccurate.
  • Jim_Harman
    Jim_Harman SuperUser ✭✭✭✭✭
    @ElPope

    You are free to exclude reinvestments when evaluating the performance of your securities.

    An IRR calculation, as used in the Avg. Annual Return columns of the Portfolio views and the Investment Performance Report, includes the reinvestments in the ending market value.

    Note that "cost basis" is a very specific term used for computing gains and losses, mainly for tax purposes. It is not necessarily the same as the amount you originally invested. 

    The cost basis of a security you hold *does* increase following a reinvestment. You have chosen to use the dividend to buy more shares.

    Can you give an example of how you think the cost basis on the Holdings screen is incorrect?

    You may want to review the lengthy discussion here for related information.
    https://community.quicken.com/discussion/comment/20048358
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  • Rocket J Squirrel
    Rocket J Squirrel SuperUser, Windows Beta ✭✭✭✭✭
    ElPope said:
     Quicken's Holdings screen portrays an inaccurate accounting of the cost basis, gain/loss and gain/loss % at the security level (not the transaction level). It just does, there's nothing really even to argue about here. I'm looking at it right now and it is inaccurate.
    Please attach a screen shot. My Holdings window shows those calculations accurately.
    Quicken user since version 2 for DOS, now using QWin Premier Subscription on Win10 Pro.
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