Samwise Quick Reference Handbook
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Hi Sam,
Slightly tangential question, but related to tracking cost bases. I remember you mentioned you use TDA (now Schwab) as your brokerage in the past; do you manually keep track of cost bases for your positions? I notice the cost basis reported by Schwab still uses FIFO in calculations; even though I’ve set my account to LIFO. Have you experienced anything like that? Would you recommend keeping track of cost bases yourself?
Thanks!
So it has been a really long time since I changed my accounting structure. I’ve been in LIFO for so long. But I suspect if your cost basis isn’t showing up properly, it probably has something to do with the timing of the shift of your accounting method.
I assume that’s what’s going on. But I’m not sure. For example, if you changed accounting methods after you purchased a position under the FIFO method, it might impact cost basis for that position.
Even if you bought the position after the fact, if there are wash sales involved that can impact things.
Really, cost basis shouldn’t be impacted at all once it’s a full clean slate.
For example, if you purchased 100 shares of Nvidia at $120 and then later buy 100 share at $130 and 50 shares at $140, then you’d have a total cost basis of
$12,000 + $13,000 + $7,000 =$32,000.00/ 250 =$128.00
Now if you sell 50 shares, the shares you sell under LIFO should be the last 50 you bought. At that point, your cost basis should be reflected as:
$12,000 + $13,000 =$25,000.00/ 200 =$125.00
This is precisely how it should be reflected under LIFO. It would shift down to $1250 based on the $120 & $130 purchases prices.
Under FIFO, they’d close out the FIRST 50 shares you bought. So it would like this instead:
$6,000 + $13,000 + $7,000 =$26,000.00 / 200 =$130.00
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Now if this math gets messed up, it could be due to the fact that you might have purchased the first 100 shares under FIFO and the last 50 shares under LIFO. Not sure if that’s what happening, but it could be.
Suppose for example, you bought 100 shares of Nvidia at $120 under the FIFO accounting method. you then change accounting methods. and then you buy 100 shares at $130 and 50 shares at $140. You go to sell 50 shares. You think it should be the most recent shares that are sold. But because you bought the first 100 under FIFO, it might still sell the FIFO shares instead.
Not sure if that’s what happening, but I can totally see that being a factor.
If not, I’d reach out to your broker and ask why.
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Now obviously premium sales aren’t going to impact ACTUAL cost-basis in the technical tax-based sense of the term. For example, in our situation above, if you sell May $150 calls against your Nvidia shares for $3,000, you don’t get a $3,000 reduction in cost-basis. It’s just an effective impact.
Effectively, you’ve reduced basis by $3,000. Why? Because you spent $32,000 on the Nvidia shares and received $3,000 from premium sales. Meaning, you really only spent $29,000 on the Nvidia shares. Or another way to think about it, you only $29,000 at risk now. And if one ends selling another $29,000 in premium throughout the year, they’ll have $0.00 of thier original capital at risk as $32,000 would now be sitting in the account. It would be 100% gains that would be off-set by any realized losses sustained in the shares of Nviida themeless. If Nvidia went $0.00 and you closed out the position, you’d have a $32,000 loss, a $32,000 gain and $32,000 left in the account with $0.00 net gains.
In that sense, I keep track of it mentally or on paper. Often on paper. All I have to do is look up the trades and I’d know what my effective cost reduction is.
Thanks Sam, much appreciation for your detailed answer as always 🙂