A Vanguard rep notified a high-net-worth Flagship investor about an August change to its cost-basis policy.
This change will impact Vanguard investors who use SpecID as their default cost-basis method.
AFAIK, Vanguard has not made any official announcements regarding this change.
From Jeff DeMaso's IVA Weekly Brief for Wednesday, July 9:
"Vanguard is updating its cost-basis policy, specifically around the use of SpecID, or specific share identification.
With SpecID, you tell Vanguard which 'share lots' you’re selling, so that you can generate
the lowest capital gains (or the highest if you’re trying to match losses elsewhere in your portfolio).
SpecID is the method I use in my accounts because it gives me the most flexibility.
Yes, it requires more manual effort, but I think it’s worth it."
"Now, Vanguard isn’t eliminating SpecID—but they are making it harder to use by removing it
as a default option for your accounts.
In the future, you’ll only be able to use SpecID when placing market orders, and to do so,
you’ll need to take an extra step or two when trading."
"If you have SpecID as your default method, you’ll need to choose a new one or accept Vanguard’s choice
of one of four different methods—average cost, first in–first out (FIFO), highest in–first out (HIFO) or MinTax."
Comments
When selling shares, there are two questions:
1) What did each share cost, and
2) Which shares were sold
If you are using average cost (called average basis by the IRS), all shares have the same (i.e. average) cost. In that case, you automatically sell the oldest ones (FIFO) first. No choice.
If you are not using average cost, then you are using actual cost (called actual basis by the IRS). Move on to question #2
Generally you tell your brokerage which rule (e.g. FIFO, highest first, etc.) you want it to follow by default when selling shares. That's just the default if you don't tell the brokerage anything different (i.e. specifically which shares you are selling).
Vanguard is a bit unusual in that it allows you to effectively select "none" as the default method of selecting which shares you are selling. It sounds like in the future you'll have to select a real default method. Which should have no real impact, since one can always override the default method by telling the brokerage at time of sale which shares you're selling.
I am skeptical that Vanguard will refuse to accept specific identification at time of sale with limit orders. I'm not even sure that that would be legal. Even if so, one could identify the specific shares sold after the fact, up until the end of the settlement date. The newsletter (at least what was quoted) does not say that Vanguard is changing this for limit orders. (Again I'm doubtful that Vanguard even could change this.)
The way this post-trade share identification works (per Vanguard):
Thanks for the additional info.
This change shouldn't affect investors who are using average cost,
FIFO, HIFO, or MinTax as their default cost-basis methods.
https://investor.vanguard.com/investor-resources-education/taxes/cost-basis-methods-available-at-vanguard
I was surprised when the IVA Weekly Brief stated that customers could only use SpecID
when placing market orders. Limit orders were not mentioned.
https://www.independentvanguardadviser.com/weekly-brief-copper-spikes-bots-trade-vanguard-glitches
via their Profile and account settings on Vanguard's website.
For the full text, navigation on Vanguard personal website is:
Profile (at the very top) > Profile and account settings > Accounts and trading >
Cost basis method > Looking to use SpecID as your preferred method? > Show more.
This expands the box to reveal "Although SpecID will continue to be offered as a cost basis option
when placing market orders, effective August 1, 2025, it will no longer be available
as a preferred cost basis method option." Then click "Learn more here" which displays the following:
Frequently asked questions
Why is Vanguard making this change?
SpecID requires you to manually identify specific lots for each sale or transfer, which makes it incompatible with automation. In some cases, such as automatic distributions, IRS rules may default your trade to FIFO if SpecID instructions aren't provided by the settlement date, which could potentially result in unfavorable tax consequences.
By switching to an automated method, you'll still have the flexibility to use SpecID at the time of a transaction, while also benefiting from having additional automated options beyond FIFO.
What are my other options?
For details about the cost basis methods Vanguard offers, go to Cost basis methods available at Vanguard.
Can I still select SpecID when placing an order?
Yes. You'll still be able to select SpecID as a method when placing individual market orders or requesting a transfer, such as gift or a change of ownership. For example, if your preferred cost basis method is MinTax, you can still select SpecID at the time of the transaction. SpecID is no longer available for limit orders, stop orders, and stop-limit orders.
How can I change my cost basis method for a particular order?
To switch your preferred method to SpecID or another method for an order, locate the investment and select Sell. Under Cost basis, select Edit and choose from the options that display.
Why is SpecID still available for market orders?
Market orders are executed immediately at the current market price, making it easier to match the specified shares with the sale. This immediacy aligns well with the SpecID method, ensuring that the chosen shares are accurately sold.
What action should I take now?
If you've selected SpecID as your preferred cost basis method for any investments, we ask that you switch them to another method before August 1, 2025.
What if I don't take any action?
Any investments still set to SpecID as a preferred cost basis method on August 1, 2025, will be transitioned to the first in, first out (FIFO) method. Open orders won't be affected.
If I specify which shares are to be sold and the order is only partially filled, which of the shares I specified were sold?
A brokerage might impose an all-or-none requirement to address this problem. (Though if this 2020 VBS agreement is still accurate, Vanguard doesn't allow AON orders.)
The workaround I suggested - specifying shares after transaction executes but before end of settlement date - would deal with this problem.
Apparently the Vanguard notice went out to some customers six months ago. See this Bogleheads thread:
https://www.bogleheads.org/forum/viewtopic.php?t=447407
One poster there got two workarounds from Vanguard customer support. The one I mentioned above, and another that wouldn't work for a speedy sale.
https://www.bogleheads.org/forum/viewtopic.php?p=8261416#p8261416
Only certain clients were affected when Vanguard updated cost-basis methods
for non-market orders (limit orders, stop orders, stop-limit orders) in January.
These same changes will impact additional Vanguard clients starting in August.
In the Bogleheads thread, a forum participant received a Vanguard email which read in part:
"This change is part of our ongoing efforts to enhance the client experience,
better align with industry standards, and streamline the trading process."
I have no ETFs in my Fidelity taxable account but do hold an individual stock in the account.
I went through the motions of selling specific stock shares using a limit order
and it seems that Fidelity would allow the transaction.
Industry standards???
This change does indeed better align Vanguard with industry standards. I wrote in my original response: :"Vanguard is a bit unusual in that it allows you to effectively select 'none' as the default method of selecting which shares you are selling. "
Brokers are required to have clients select what Fidelity calls a default "disposal method". In this way clients tell the broker the order in which to dispose of shares in a sale if the client does not specify which shares are to be sold at the time they place a trade.
If a client says that their default disposition method is specific ID, then they are effectively giving no default method to be used in lieu of specific ID. No other institution I'm aware of has allowed clients to explicitly give "specific ID" (i.e. "none") as the default disposal method.
Regarding this change affecting only some Vanguard clients: It is true that only clients that had selected "specific ID" as their default disposal method are directly affected (and I'm guessing are the ones who received email notice). Still, all clients were affected when this change took place because they became unable to change their default disposal method to "specific ID".
This change has already taken place generally. Vanguard currently writes: "[Specific identification] method is not available as a preferred cost basis method".
https://investor.vanguard.com/investor-resources-education/taxes/cost-basis-methods-available-at-vanguard
As to restricting the use of specific ID to market orders, Vanguard's FAQ addresses the rationale. Consider the following limit order to sell 300 shares @$25.00 from three specific lots and only 150 are sold:
Lot 1: 100 shares purchased on 7/1/23
Lot 2: 100 shares purchased on 7/1/24
Lot 3: 100 shares purchased on 7/1/25
The specific ID order says only that these 300 shares are to be sold. Suppose one lot is sold @25.10, then the bids over $25 dry up. A few hours later, the price recovers and the broker is able to dispose of another 50 shares at $25 even. The remaining 150 shares remain unsold.
Which shares did the broker sell at $25.10, which at $25.00? Had a market order been placed, they all would have sold at virtually the same time. (Though admittedly there could still be sold at slightly different prices - placing a market order reduces but does not eliminate the pricing problem.)
The answer to this question affects long term vs. short term cap gains and also current gains (assuming the various lots were acquired at different prices.)
Fidelity is the only place I've found that answers this question (sort of). On its help page for trading specific shares it answers this question: As to the order of the tax lots selected, the closest Q&A I can find is: All well and good, but Vanguard's FAQ raises the question of what happens with automatic distributions (or automatic rebalancing). WIth a default disposal in place, that is the ordering applied. And as I explained above, "specific ID" is tantamount to having indicated no default method.