My mutual fund companies have been mailing me forms with which to select a cost basis calculation method. I understand the basic concepts, and I can also see that some methods are more labor-intensive than others.
Question: how different are the tax consequences of the different methods? My mutual fund investments are long-term things: I make a deposit approximely every month, and expect to continue doing so until I retire in about 25 years, at which point I will begin making withdrawals.
Assuming I have (or can obtain) the purchase prices/dates of all of the lots of shares I’ve purchased, is it likely to be worth my trouble to calculate cost basis of sales using LGUT (or anything other than the MF companies’ default Average Cost method)? Can the selection of lots to sell under the LGUT method be easily automated in a spreadsheet or program?
In the short term, with sales of only some of your shares, it can make a very big difference.
Let’s say you bought some of the fund when it was $10/share and bought some more when it was $100/share. You sell at $80. If you sell from the first lot only, then your gain is $70/share. If you sell from the last lot only, you have a loss of $20/share. If you use averaged cost, then you have a gain of $25/share.
Of course, if you sell everything at once, then your total gain/loss is the same regardless of which method you used. That’s one reason why averaged cost is so common; many people liquidate an entire position at once instead of selling portions of it over time and it really didn’t matter how the basis was tracked.
I don’t know of software that automates the lot tracking (I’m sure it exists somewhere), but Excel will do the job. Just enter each lot with the purchase price/date/etc. When there’s a sale, you can pick which lot you wanted it to come from and then update the remaining quantity of stock. Remember, reinvested dividends are their own lots, so it can turn into a fair bit of data.