Gain for Covered vs Non-Covered Shares

[fmuser]

I apologize if this has already been answered. I didn't find anything in my search of the forums or FM help.

US tax law changed a few years ago to distinguish between "covered" and "non-covered" shares (based on whether the shares were purchased before Jan 1, 2011), and require detailed (lot/share-level) cost-basis tracking by the holding institution for covered shares.

Vanguard responded to this by separately computing average cost for covered and non-covered shares, and offering this explanation of how shares are handled in an account that includes both covered and non-covered shares:

"If you use the average cost method for covered and noncovered shares, Vanguard will sell your oldest (noncovered) shares first. Once all noncovered shares are sold, Vanguard will sell the covered shares. You'll also have two average cost figures—one for your noncovered shares and one for your covered shares"

I don't see an obvious/good way to handle this in FM. If I leave all transactions in one FM investment file, I don't get the same average cost that Vanguard will report, but if I separate transactions into two investments, I must split all distributions after Jan 1, 2011 (more work than I'm willing to do) to reflect true returns for the two sets of shares.

Any suggestions?

[Mark]

Hi fmuser,

That is a tricky one... It sounds like you're basically looking for 2 different "average" costs within a single investment. Fund Manager can't do this. To get these 2 average costs, the only option I can think of is to create 2 separate investments.

[aviator]

I've edited my post below to include information that hopefully will be helpful to others. (All changes in italics and blue.) I'm a buy and hold investor and seldom pay attention to cost basis. I do, however, harvest tax losses at year end and I've found FM to be the most efficient tool for helping make decisions (ergo, accurate cost basis in FM is important). Highly recommend making several backups before proceeding.

Is it possible to use the following method to work around this problem:

1) Compute the average cost for non-covered shares.
Vanguard provides this information on their website. Go to the cost basis page and click on "show details". The first line will show the imputed cost basis for non-covered shares. It also shows respective effective dates the IRS uses for different holding types (stocks and certain ETFs vs. Mutual Funds vs. Bonds and options)

2) Delete all purchase transactions prior to 1/1/2011*. Replace with a single purchase transaction dated 12/31/2010 with the average cost and number of shares purchased prior to 1/1/2011. (Might want to input something in the memo field to reference what you've done.)
Instead of using a transaction date of 12/31/2010, I used 1/1/1970. Reason is there were some non-purchase transactions prior to 12/31/2010 that shouldn't be deleted (account fees, for example). The 1/1/1970 date worked better. Further, instead of doing a "Purchase" transaction on that date, I used instead a "Transfer In". The transfer-in transaction allows me to manipulate OOP and, if necessary, cost basis.

3) Leave alone all purchase transactions on or after 1/1/2011.

Would this method result in matching Vanguard's cost basis?

* Make appropriate backups before attempting this.

[Mark]

Hi aviator,

Nice idea, thanks. Yes, I believe that would accomplish the goal here.

[aviator]

Mark, I've made some changes to my original suggestion. Please review. I've implemented these changes in my portfolio and so far everything looks good -- my cost basis matches Vanguard's to the penny.

[Mark]

Hi aviator,

Thanks for your efforts on documenting this. That makes sense, and using a Transfer In does allow more flexibility on specifying cost information.