"kevwalsh" <kevwalsh[at]gmail.com> writes:

- quote -

Because if the share price has risen over time, and there have been
regular purchases, using single-category averaging for a complete
liquidation will tend to turn some long-term gains into short-term
gains, the latter being much less favorably taxed.

For partial liquidations, there are a number of reasons why one might
want to use something other than single-category average cost
depending on particular situations.

- quote -

Vanguard's basis statement would do that, yes. But many people
who do it by hand forget to do that -- hence the warning.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

It is tax time (for me anyway), and I being fairly new at mutual fund
investing, I have two questions.

I exchanged all of my shares held in one fund for shares in a different
fund. I owned most of the shares for more than a year, but also had
automatic reinvestment of dividends and gains. So...

1. My investment company (Vanguard) gave me a single-category average
cost printout for tax purposes, but mentioned in their brochure that
the single category method "might not be appropriate" if you completely
liquidate your account, or possibly in other situations. I guess I
don't quite see conceptually why liquidating your account should matter
much. What is the deal with this statement?

2. A website I looked at
(http://www.wellsfargo.com/investing/...ds/taxes.jhtml) has a
warning about double paying taxes when you use automatic reinvestment
in a mutual fund, saying that when you get the dividends you pay taxes
on them, so when they get reinvested you need to take special
precaution to adjust the basis later since you already paid taxes on
them. I don't understand this at all, since (a) everything I put in has
already had taxes paid by me, eg my w-4 income, and (b) wouldn't the
cost of the reinvestment purchases get figured into any basis
calculation, eg the single-category average cost calculation I got?

Thanks,
-K