Cost basis for stocks and mutual funds

<p>The company that holds most of my mutual funds, ETFs, and stocks has been asking me to make selections on the method to keep track of cost basis as per new IRS regs that require them to report cost basis info to them.
Their current offerings for mutual fund customers is:
Average cost (default)
Specific Identification.</p>

<p>For Stock and ETF accounts, they offer:
FIFO (default)
Specific identification</p>

<p>They went on to give a series of pros and cons for choosing one versus another, typically, the more control you want, the more bookkeeping and legwork you need to do. A couple of other fund companies haven't raised this issue at all. </p>

<p>What have you folks chosen, and did you have any problems synchronizing it across different brokerages and fund companies? Have you investigated if there are problems if you use one scheme for some assets while others use another? </p>

<p>I won't do specific identification because it sounds like a lot of work and record keeping. Does the average method (as opposed to, eg. FIFO) force some gains to be short term because it's averaging the old and the new, and does it hence make sense to look at FIFO?</p>

<p>You should be able to specify which method you want to use when you sell the equity/fund/ETF. I've never had a problem doing that (knock on wood). The issue I've had the most trouble with is automatic reinvestment of dividends. Unless your brokerage keeps track of that, it's a royal PITA to figure out how much needs to be added back into the basis ... ESPECIALLY if you periodically sell a portion of your position.</p>

<p>I do tax-loss selling when it makes sense ... but I'm inclined to sell the entire position. When selling a part of the holding, I don't believe there's any issue selling the most recent portion LIFO (presuming you have a loss in that portion and that you'd benefit from a loss), and later selling half of the remaining position FIFO. Record-keeping requirements will be significant of course, especially if you're automatically reinvesting dividends.</p>

<p>Finally "does the average method (as opposed to, eg. FIFO) force some gains to be short term because it's averaging the old and the new ...?" Well, yes. But you may have the same issue with FIFO if you purchased the position over time.</p>

<p>In my trading accounts, ideally I'd close everything in mid-December and then start opening positions in mid-January so everything is short-term and there an no carryover issues. But I usually don't fully execute this approach.</p>

<p>I think that I'd prefer FIFO just because that's what I am used to and it's fairly simple. In the end, I hate doing taxes and usually just go for the easiest way out. Yes, I may miss some tax savings but I will trade time and frustration for $$$$ given the right circumstances.</p>