For I am Costanza, Lord of the Idiots... (changing cost basis AFTER stock is sold)

[ryanf1475]

Hello again my friends, stupidly in 2020 I paid a high tax bill because I used the default cost basis method, and my tax situation this year is such that it would make more sense to move those profits to this year and beyond. My question is: am I allowed to amend my 2020 taxes in order to change the cost basis method of securities I sold that year? In other words, I would be using a method different from what Vanguard used to calculate my gains, and therefore submitting lower gains. Is the IRS OK with that, or is the method basically immutable after the fact? Are there any special supporting documents I would need to submit?

Many thanks,
Ryan

 

[LdiJ]

Hello again my friends, stupidly in 2020 I paid a high tax bill because I used the default cost basis method, and my tax situation this year is such that it would make more sense to move those profits to this year and beyond. My question is: am I allowed to amend my 2020 taxes in order to change the cost basis method of securities I sold that year? In other words, I would be using a method different from what Vanguard used to calculate my gains, and therefore submitting lower gains. Is the IRS OK with that, or is the method basically immutable after the fact? Are there any special supporting documents I would need to submit?

Many thanks,
Ryan

Cost basis is cost basis. I am uncertain what you mean by changing methods. I can tell you however, that any time you amend a return, you increase the likelihood that it will be questioned and that you will be required to prove whatever it is that you are changing.

When a brokerage reports cost basis to the IRS on a 1099B, it is assumed that the cost basis is accurate (and the vast majority of the time it is). There are times when it is not but then there should be a paper trail to prove that it is inaccurate. So, there really isn't an alternate method to calculate cost basis. It is either accurate, or it is not.

 

[ryanf1475]

Sorry, let me clarify. I did not sell all of the shares. Therefore, for example, one cost basis method such as FIFO would lead to X amount of gains, whereas another method, LIFO, would lead to a different amount. So what I want to amend is which shares are considered to be sold (the higher cost shares, not the lower cost).

 

[Taxing Matters]

Sorry, let me clarify. I did not sell all of the shares. Therefore, for example, one cost basis method such as FIFO would lead to X amount of gains, whereas another method, LIFO, would lead to a different amount. So what I want to amend is which shares are considered to be sold (the higher cost shares, not the lower cost).

When it comes to stocks, your cost basis in the entire lot of the stock is of course, whatever you paid for the shares. When you sell the shares, however, you have the choice of either: (1) identifying the specific shares to be sold, if that is possible, and then use the cost of those specific shares to compute the gain or (2) assuming the first shares bought were the ones sold (FIFO) and using the cost of your earliest shares in the lot to compute the gain. LIFO is NOT an option here. And, except for mutual funds, neither is average cost basis. See IRS Publication 551 for the details. If you didn't identify the specific shares to be sold prior to the sale— and instruct your broker accordingly — you're stuck with FIFO for determining your basis.

 

[davew9128]

If you didn't identify the specific shares to be sold prior to the sale— and instruct your broker accordingly — you're stuck with FIFO for determining your basis.

While I agree with your legal analysis, OP indicates they sold Vanguard, which is exclusively mutual funds. These days most RIC's report basis on sales using average cost. From days long ago, we used to have to actually make an election to do that, but these days its so commonplace its basically substantial compliance. In fact a quick look at the reg shows that a taxpayer must either elect a method or use the broker's default method - in this case average cost.

Now assuming the OP wants to change, yes they can change the method but only prospectively, and honestly, as a practical matter I seriously doubt anyone would want to go through the hassle of figuring it out.

 

[ryanf1475]

Vanguard is my broker. I sold individual stocks like Apple and Google. In any case, I am relieved by your responses--I was not looking forward to that hassle, although it could have potentially saved me lots of money.

 

[Taxing Matters]

While I agree with your legal analysis, OP indicates they sold Vanguard, which is exclusively mutual funds.

That was a good catch. I'm not that familiar with Vanguard's current offerings or how it has been reporting basis, so I just provided the basic rules rather than the more specific information you were able to provide. I seem to recall my grandfather was big into Vanguard investments many decades ago as he lived near the headquarters for Vanguard and could go there to do his transactions, but I never really looked into Vanguard beyond that.