Tax Lot/Covered & Non-Covered Shares questions

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JookieBrown
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Joined: Sun Aug 04, 2019 7:46 am

Tax Lot/Covered & Non-Covered Shares questions

Post by JookieBrown »

Did a lot of reading/searching about this and want to be sure I understand correctly.

Mutual Fund held in a taxable account @ Schwab (xferred from another broker in 2019, no transactions made at Schwab).
  • All lots are long-term and there are no losses for any lot, regardless of what cost method I use
  • Last purchase was in 2018; not buying any more
  • Schwab is currently showing all lots grouped into two Avg cost positions - one for covered & one for non-covered shares (they're in the process of updating actual lot costs)
  • Looking to exit the entire position over time (2-3 years or so) to manage income from the exit
  • I had 1 sale in 2018 at the prior broker which came entirely out of non-covered shares and an AVG price
Questions:
  • I think I'm always locked into Avg Cost for all non-covered shares because of that earlier withdrawal, correct?
  • Until I sell a covered share using Avg Cost, I can choose whatever cost method/lot disposition I want for those shares, correct?
  • Can I still change to specID and sell specific covered shares?
  • If the bullet above is YES, if I sell some shares using High-Cost, for example, and switch back to Avg Cost after, does my avg cost per share change because I have fewer shares?
  • Can I switch back to Avg Cost & sell non-covered shares, then move back to High-Cost and sell covered shares, and then back to Avg Cost to sell non-covered (rinse repeat)?
Hope I covered everything, appreciate your insight!
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retired@50
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Location: Living in the U.S.A.

Re: Tax Lot/Covered & Non-Covered Shares questions

Post by retired@50 »

JookieBrown wrote: Wed Sep 22, 2021 3:38 pm Did a lot of reading/searching about this and want to be sure I understand correctly.

Mutual Fund held in a taxable account @ Schwab (xferred from another broker in 2019, no transactions made at Schwab).
  • All lots are long-term and there are no losses for any lot, regardless of what cost method I use
  • Last purchase was in 2018; not buying any more
  • Schwab is currently showing all lots grouped into two Avg cost positions - one for covered & one for non-covered shares (they're in the process of updating actual lot costs)
  • Looking to exit the entire position over time (2-3 years or so) to manage income from the exit
  • I had 1 sale in 2018 at the prior broker which came entirely out of non-covered shares and an AVG price
Questions:
  • I think I'm always locked into Avg Cost for all non-covered shares because of that earlier withdrawal, correct?
    You might be locked into average cost due to the earlier withdrawal, OR, because the custodian doesn't have all the relevant data to support spec-id transactions. IF you have all the relevant spec-id data, you CAN use spec-id when filing taxes. When you sell non-covered shares the custodian doesn't send any cost basis data to the IRS, it goes as "Cost basis not reported" so you can either accept the average cost numbers the custodian shows, or you can dig through your own records and tell the IRS what basis you are reporting.
  • Until I sell a covered share using Avg Cost, I can choose whatever cost method/lot disposition I want for those shares, correct?
    Yes, this is my understanding.
  • Can I still change to specID and sell specific covered shares?
    Yes, if you haven't used a different method during a sale.
  • If the bullet above is YES, if I sell some shares using High-Cost, for example, and switch back to Avg Cost after, does my avg cost per share change because I have fewer shares?
    I don't know whether the average cost would change or not. I wouldn't advise switching back to Avg Cost. In my opinion, spec-id is the best way to deal with cost basis. It has no disadvantage of any kind. It allows for pinpoint control when selling covered shares.
  • Can I switch back to Avg Cost & sell non-covered shares, then move back to High-Cost and sell covered shares, and then back to Avg Cost to sell non-covered (rinse repeat)?
You don't need to switch back and forth. All non-covered share sales will be separated on your statements as such. If you choose spec-id you'll gain the ability to dictate precisely which covered shares are sold. Since the non-covered shares are lacking the necessary cost data, the proceeds will be reported to the IRS, but not the underlying cost. So, as stated above, you can either accept the custodian's average cost number for the non-covered shares or you can dig through your own records to use the cost for one or more specific lot(s).

Hope I covered everything, appreciate your insight!
See answers above in blue.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
JookieBrown
Posts: 15
Joined: Sun Aug 04, 2019 7:46 am

Re: Tax Lot/Covered & Non-Covered Shares questions

Post by JookieBrown »

I appreciate your input! :sharebeer

My thought about moving back to avg cost is to use spec lot to sell lots with lot costs greater than the avg cost to minimize gain and then switch back to avg cost and then dispose of the rest (which would otherwise carry a lower cost and therefore a higher gain). Of course, if the avg cost gets recalculated this doesn’t make sense.

This seems like something smarter people than I would’ve figured out, so I’m guessing my bright idea is really a dud somehow. :D
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retired@50
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Re: Tax Lot/Covered & Non-Covered Shares questions

Post by retired@50 »

JookieBrown wrote: Fri Sep 24, 2021 5:26 pm I appreciate your input! :sharebeer

My thought about moving back to avg cost is to use spec lot to sell lots with lot costs greater than the avg cost to minimize gain and then switch back to avg cost and then dispose of the rest (which would otherwise carry a lower cost and therefore a higher gain). Of course, if the avg cost gets recalculated this doesn’t make sense.

This seems like something smarter people than I would’ve figured out, so I’m guessing my bright idea is really a dud somehow. :D
The non-covered shares will always and only be available to sell at average cost, assuming you don't have all the relevant data to support any other method.

The covered shares (if set to spec-id) will allow you to pick and choose among which lots / shares you want to sell, which will give you complete control over how much gain or loss to realize.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
increment
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Joined: Tue May 15, 2018 2:20 pm

Re: Tax Lot/Covered & Non-Covered Shares questions

Post by increment »

JookieBrown wrote: Fri Sep 24, 2021 5:26 pm My thought about moving back to avg cost is to use spec lot to sell lots with lot costs greater than the avg cost to minimize gain and then switch back to avg cost and then dispose of the rest (which would otherwise carry a lower cost and therefore a higher gain). Of course, if the avg cost gets recalculated this doesn’t make sense.
"Average cost" means "the average among all the shares that you have and are allocating into the averaging pool", not "the average of all shares you have ever owned including those which you sold earlier because their basis was high."
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