I received e -mails from Wciers (and my own daughter) that Vanguard sends them e -mails with this message. The e -mail starts with the title: “Action Need: Choose a method for automated cost basis.”
And from there, Vanguard describes his recent decision to stop using the Specid option as an automated cost -based cost method in your taxable account. Instead, starting in August 2025, it says that the only automated methods will be: FIFO, MINTAX and HIFO.
Here is the entire e -mail.
The e -mailers ask: “Which one should I choose?”
So far I have just reassured them that it doesn’t matter. As Vanguard says: “You can still use Specid for individual transactions.” I am planning to include Vanguard in that offer, as I always have when selling shares to tax loss harvest or donating shares to our Donor Advised Fund (DAF). But because you have to choose something and because FIFO is probably the worst to choose, I tell them to choose ‘Mintax’, which should be a little better than Hifo.
I wasn’t sure why I hadn’t received this e -mail yet. Maybe it was because we have a fairly large account, so maybe we are exempt from the requirement. Perhaps it is because our taxable account is in trust, and maybe it is exempt. Perhaps Vanguard just didn’t come close to send me an e -mail, or I somehow just missed it. On July 23, 2025 I logged in to my Vanguard account to view things. There were no messages to me or pop-up messages. So I went to the costs/basic page, and this is what I saw.
And yes, my cost -based institutions are still all on specific identification (Specid) (well, except DISV, a relatively recent purchase, because it is our tax loss harvest partner for AVDV).
I thought while I was there, I would just change my method. And yes, Specid was still available, and that’s what I chose.
Although I have no idea why some Vanguard investors get this message and I am not, this is a good opportunity to discuss the different methods for a cost basis and what they mean. But first let’s define some terms.
What is a cost basis?
Cost -based is just what you have paid for security, such as an investment fund. If you have purchased it for $ 10 per share and later sell it for $ 12 per share, your cost -based $ 10. You will only owe any power gain tax at $ 2 per share. Think of it as your director.
More information here:
Why Vanguard?
What is a tax party?
A tax pot is just a single purchase of shares that have been purchased in a non-qualified (taxable) brokerage account at a specific time. If you buy shares every month, you have a tax pot for every month. If you log in to your Brokerage account and look at your cost-based basis (click at Vanguard, click “Holdings”, use the menu to scroll down to “cost-based rental profits/losses” and then scroll to the applicable account), it looks like:
In this example you can see some larger tax parties, such as those on October 9, 2018, and you can see periodic smaller ones, as they see on December 21, 2018. This is what happens if you reinvest dividends in a taxable account. You just end up with a whole group of more tax parties. It is not the end of the world, because the brokerage will keep them all, but it does add some complexity. This is a reason why we do not reinvest dividends in our own taxable account (the bill above is a Utma for one of my children). The other reason is to reduce sales problems when harvesting the tax loss. So we have much fewer tax parties for our companies than our children, despite a much larger account. In fact, we only have four taxes a lot of VXUS (and six from IXUS, the tax loss harvest partner), something we have been investing regularly in for many years. By avoiding the automated reinvestment of dividends, consolidating tax parties when harvesting the tax loss and donating shares to a charity, you can keep the number of tax parties quite low, even with large accounts.
What is a cost -based method?
The cost -basis method is simply how the brokerage, such as Vanguard, decides which shares to sell when you are going to sell shares. For example, if you first chose, first out; You do not select which taxes to sell a lot; And you are going to sell 100 shares, the brokerage simply sells the oldest 100 shares of that security in the account. This can lead to less than ideal tax consequences, especially if you try to lower the most recent shares you have purchased.
What are the cost -based methods?
Vanguard apparently offers (me) of (me) of their five cost -based methods to choose from. Four of those five are fairly standard and available everywhere. One of them is relatively new and other brokers have comparable new options.
First, first from
Firstly, first out (FIFO) is often the standard method, although I am not sure why, because it seems that it is the worst possible method. In general, the shares in the first tax pot you ever bought were probably the cheapest. They have the lowest base and therefore the highest tax assessment in connection with their sale. But that’s how FIFO works; The brokerage simply sells the first shares you have purchased.
Last in, first out
Last in, first out (lifo) seems a little better. In this method, the brokerage sells the most recent shares that have been purchased until it sells the number of shares you ordered to sell. The basis on this must be a lot higher and the tax assessment must be lower. However, there is a catch. These are not always the highest basic shares, because stock value fluctuates. Moreover, there is a good chance that the most recent shares were purchased in the past year, and the sale of that would lead to a profit to a short -term capital gains (taxed against ordinary income tax rates) instead of a long -term power profit that is eligible for the lower tax rates for capital profit.
Average costs
The average costs (AVGCOST) may be simple, but it is also a less than ideal method for those of us who actually want to minimize our tax burden. It is actually on average your cost basis for all your shares ever bought. The worst of this method is that once you sell some shares for a company using AVGCOST, you are locked up in that method until all shares are sold. Perhaps there is a situation where this is a good thing, but I can’t think of it. It can even convert a long -term profit into the short -term profit. This method is so bad that Vanguard can register in it at the time of online choosing instead of online.
Specific identification
Specific identification (Specid) solves all these problems by manually selecting which tax parties you want to sell. It is definitely the way you want to tackle the sale of shares if you give control of your tax assessment. This allows you to only lose the harvest of tax losses. This allows you to ensure that everything that is sold with a profit has a long -term power gain. This allows you to donate to the charity, the lowest basic shares that have been property for at least a year. If you are on the 0% capital gain bracket and want to take advantage of it, you can select the shares with the lowest base, so that you can tax the harvest. If I have lately robbed the Utma of my oldest daughter, I have chosen the shares with a low basis because she does not have enough income to owe long -term capital profits on that turnover. By the way, I have no longer had access to her Utma since her 21st birthday, so I teach her how to deal with this problem. Now she can become legally drunk and increase her own tax assessment.
Minimal load
The Minimum Tax (Mintax) method is the latest addition to the list. Because Specid works so well, I have not taken the trouble to learn exactly how it works until recently. I think it is for people who do not really understand the cost basis and power gain tax or who simply cannot suffer from such details. For this message I delved into how it really works. Fortunately, Vanguard offers A definition of each method together with advantages and disadvantages. This is what it says about Mintax:
Specifically, Vanguard says it sells shares In this order:
- Capital loss in the short term from the largest to smallest.
- Long -term capital loss from large to smallest.
- Short -term profit or loss.
- Long -term zero win or loss.
- Long -term capital profit from the smallest to the largest.
- Capital profit in the short term from the smallest to the largest.
In short, it is assumed that you are not in the LTCG bracket of 0% and sell the shares that will result in the lowest tax assessment for this transaction. Usually that will first be shares with a loss, followed by the highest basic shares with a profit that you have for at least a year. However, that is a long list of disadvantages above, so I continue to use Specid and manually select which shares are sold – even if I can no longer choose it at some point as my “standard” cost -based method. With Specid I can consolidate tax parties by selling/giving small lots and minimizing my total lifespan of the lifespan. But as a standard method, yes, Mintax is pretty good.
More information here:
Vanguard vs. Fidelity – What is best for your investments?
Shall I be protected if my investment broker goes bankrupt?
Fidelity
Other brokers also offer cost -basis methods that are designed to lower your tax burden. If you go FidelityYou will see even more options, including:
- First, first from
- Intraday first in, first out
- Last in, first out
- High cost
- High costs, long term
- High costs, short term
- Low
- Low costs, long term
- Low costs, short term
- Tax -sensitive
- Tax -sensitive, short term
Look at all the things you don’t have to learn if you are willing to simply identify the tax parties from which you want to sell shares! Here are the descriptions of Fidelity:
Schwab
Schwab does not offer as many options as faithfulness, but it still has the following
- First, first from
- Last in, first out
- Average costs
- Low
- High cost
- Tax much optimizer
- Specific identification
Tax Lot Optimizer seems to be about the same as Mintax at Vanguard and tax sensitive at Fidelity. The Schwab description is:
“The Tax Lot Optimizer Uses An Algorithm to Calculate the Optimal Way to Minimize The Tax Impact of Each Sale. In General, The Goal Is To Sell Investments for Losses First (Short-Term Losses, then Long-term Losses) and Gains Last (Long-Term-Termot, Long-term Gain-Termot Last-Last-termot, The Tax Lot Optimizer Looks for the Highest Cost Shares First, and the Algorithm also Considers The Holding Period of Each Share can be a good option for investors who want to minimize taxes or minimize the harvest of the tax loss.
If you are not sure what you should probably do if you use Specid, it should give you a reasonably good idea. Sell shares with a high basis for at least one year, and give shares with a low basis for at least a year.
The Bottom Line
When selling or giving shares of your taxable account, identify these shares specifically. If Vanguard forces you to choose a “standard cost base method”, choose Mintax.
What do you think? Did you receive the letter? What did you choose? Do you do something other than Specid when selling or giving shares?
#Vanguard #Automated #Cost #Basic #Mail #White #jacket