Incorrect cost basis after upgrade to latest version 1918

Jerry's Avatar

Jerry

09 Aug, 2020 05:31 AM

Hi,

I have a Municipal bond that pays out dividend monthly, and I set auto reinvest.

Before version 1918, let's say I get dividend of $200, and reinvested into 20 shares, I will add an entry of buying (maybe choose DivReinvest also works, but I cannot remember) 20 shares at cost of 0. This will add my # of shares balance by 20, without changing my cost basis, so that I can alway rely on "% of Change" in the Portfolio View tab to know my exact return. (In my example, I purchased this fund of $140K, so the cost basis should always be $140K, after "buying" additional share at cost 0)

After version 1918, I noticed that my cost basis suddenly increased a lot (It actually goes to ~$160K). Some play around tells me that, now even if I set the total "Buy" cost as 0, MD will still multiply 20 shares with $100 (the default per share price when total amount sets to 0) and then add to the cost basis (so added $2,000). If instead, if I change the buy entry cost to $200, instead of 0, the portfolio cost basis will add by $200. Same issue if I use "DivReinvest" instead of "Buy".

I think the problem is that, before version 1918, when I choose "Buy" as the type, and choose 0 in Amount, Price will auto set to 100 (Cannot be 0 or empty), but it will NOT be added to cost basis. Now with version 1918, the 100 price will be added to cost basis.

In my first and second screenshot, you can see I only have initial purchase of $140K, and all are dividends reinvest. In 3rd screenshot, the cost basis is now $144K, instead of 140K.

Any idea, what I can do to not add up the cost basis, for such dividend reinvest? Thanks!

Another issue (screenshot 4 and 5)
I accidentally added an entry of buying some shares with total cost of $0.01, and per share price is auto calculated at 0.000594USD. I then deleted the entry, but now the fund shows the latest price as 0.000594 per share. But I cannot see this 0.000594 in the price history, and don't know how to delete it.

  1. 1 Posted by sth on 12 Aug, 2020 11:57 PM

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    The problem is that you have entered incorrect data and thus the basis cost is off. A dividend is not buying shares at zero cost. It is a dividend that you now decide to invest and the amount of the dividend is added to the total cost basis.

    So record the dividend as a payout and then a buy for that amount and however many shares. This will correctly calculate the cost/share for the purchase.

    If you used dividend reinvest it means that it is only one entry instead of 2 but the calculation is the same. Dividend reinvestment is not a zero cost purchase. You are deciding on a buy at the current share price.

  2. 2 Posted by Jerry on 13 Aug, 2020 12:15 AM

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    Hi sth,

    Thanks for your response.

    I deleted my last divReinvest entry (screenshot 1), which show my cost basis is $142,970.54. (screenshot 2)

    I then added one entry of dividend payout of 209.96, and another entry of buying 16.824 shares for a total of 209.96 (Screenshot 3). But now the cost basis shows $143,180.5. So this still not getting correct cost basis?

    What I want is when there is dividend reinvest, I want the cost basis remains, since that's the amount I initially invested, so that I can better track "% of Change" to show the gain.

  3. 3 Posted by dwg on 13 Aug, 2020 01:13 AM

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    I'm a fellow user.

    An Investment account is there to show all transactions in an Investment and it shows the current value of the investment.

    The cost basis of an investment is not just the original investment. it is in the cost of all purchases made of that particular security and the cost of each purchase is something the cost basis report shows.

    The cost of the original investment is just one transaction in a series of transactions.

    By trying to keep the cost as the original cost and treating subsequent purchases as a zero cost is distorting the investment, it actually implies there have been capital returns and these have been use to purchase the subsequent shares thus reducing the costs basis of each lot purchased.

  4. 4 Posted by sth on 13 Aug, 2020 03:01 AM

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    Jerry,
    This all looks correct to me. The top register and balance are exactly the 209.96 difference. The second register has a transaction on 8/1 that is not in the top register. If in the top register you add a DivReinvest that corresponds to the 8/1 buy/sell pair in the top screen shot the account value will be the same.

  5. 5 Posted by Jerry on 13 Aug, 2020 03:19 AM

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    Hi dwg,

    In my example here, I invested $140K, and nothing else. I received monthly dividends but reinvested, so I don't receive any cash (there might be tax related, but that's not important to my accounting).

    So at the end of the day, all I have is:
    - I invested 140K cash
    - I didn't receive any cash into my bank account, or invest any additional cash.
    - I have certain number of mutual funds, let's say 110 shares (Maybe 100 from initial investment, and 10 from reinvestment of dividends of $10K)

    So I think I should still consider the cost basis of 100 shares as $140K (the amount out of my pocket), right? Why I should add the dividends of $10K to the cost basis, and say this cost basis has increased to $150K? That does not make sense to me.

  6. 6 Posted by Jerry on 13 Aug, 2020 03:20 AM

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    Hi sth,

    I don't quite understand what you said, can you show me how to do the registers to get:
    - share of the fund add 16.824
    - cost basis do not change

    Thanks!

  7. 7 Posted by dwg on 13 Aug, 2020 03:30 AM

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    In an accounting, a legal, and a taxation sense a Dividend reinvestment is the same thing as receiving the dividend in cash and then using that dividend to purchase more of a security.

    A Dividend Reinvestment Plan just makes the process more direct and may offer certain other benefits, - perhaps a discount, nil brokerage fees etc, but it is still considered to be two events firstly an income event and secondly a security purchase event.

  8. 8 Posted by Jerry on 13 Aug, 2020 03:43 AM

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    Thanks dwg! I think what you suggest probably makes more sense for accrual accounting, instead of cash accounting.

    I was able to get cost basis unchanged using DivReinvest prior version 1918, but unfortunately this is changed, and now there is no way for me to really know the actual return rate of an investment. (Unless Moneydance can add another field in the summary tab to show dividends, so that I can know of the new cost basis, how much is caused by realized dividends)

  9. 9 Posted by sth on 13 Aug, 2020 01:35 PM

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    This should not have ever been true and I see nothing in the release notes about a change to the basis cost calculation in 1918. But it may depend from how old you are updating.

    The basis cost is NOT the original cost. This is NOT the meaning of a basis cost.

    If you buy 100 shares for $10 the basis cost is $1000. If you then add another 100 shares for $20 then the basis cost for you 200 shares is $3000. This is what everyone (ie accountants, tax folks, financial software developers etc) call a basis cost. Reinvesting dividends is just like that second purchase and must be included.

    Dividends are "Current income" and essential the same transaction as if they handed you cash. If you decide to purchase more shares with that cash, that is a reinvestment and adds to the basis cost as of the date you bought more shares.

    I am not sure what you want the original investment value for? If you are looking for performance data then you should be looking at the ROI which accounts for different purchase dates and reinvestments.

    In any case you should never use "basis cost" for what you mean by original investment cost. Just stop using that word if you want to communicate with the rest of the financial world. It will save a lot of time.
    (Scott - not IK investment)

  10. 10 Posted by Jerry on 13 Aug, 2020 04:17 PM

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    Hi sth,

    Thanks again for your thoughtful response.

    I always upgrade to latest version of MoneyDance, so the last version that works is the last one before 1918. I will try to see if I can reinstall the old one to show you how that worked. (Don't see that in Moneydance website, which only shows 2017 versions and before)

    I think we have the confusion on the names. I understand you believe cost basis is "tax cost basis", while I only do cash accounting, so I only care about "cash cost basis", meaning I only care about how much cash I paid to the investment. So to me, a dividend reinvestment, has no impact on my cash flow, therefore when calculating ROI, the cash cost basis should not change.

    I have some investment portfolio that does not have any tick to track the overall performance, and the only way I know the value is to manually type the current value, so that I can read "% Change" in the portfolio view tab to know the actual ROI.

  11. 11 Posted by Ben on 13 Aug, 2020 04:57 PM

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    Jerry, I'm just another user but can I recommend the Investment Performance report? You can set it for any date range and if you set it to begin on/before you made the investment, you'll see the full return on your investment, including reinvested dividends and share price changes, as a return amount and a return %, based on your original investment.
    It'll also show the overall return if you've deliberately invested more since that initial investment, as well reinvesting dividends. Sadly, in Moneydance 2019.3 (1880) and versions before that, the attempt to turn that into an annual return on investment can go very wrong and is best ignored. Moneydance 2020 may be better.

  12. 12 Posted by sth on 13 Aug, 2020 05:30 PM

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    Well you can call it cash cost basis and try to confuse the rest of the universe. It is not just "my belief" here. But note that the dividend is really a cash distribution and should count against a "cash cost basis" if you are planning on newly minting this term.

    It seems that you want MD to do something that is very non-standard and special to your way of thinking. Given the title of the thread, I have to say that the cost basis of an investment is NOT incorrect and is calculated correctly and has been done so for several years. There is nothing changed in the cost basis calculation in the difference between build 1917 and 1918 according to the changelog.txt.

    The investment performance report may be what you want, but you will have to have entered all the dividend reinvestments correctly. If you want to enter a dividend instead as "shares transferred into" the account from some random category that you can ignore you can do that and go on from there.

    I showed how the Dividend ReInvestment setting will exactly match a Dividend and a Buy transaction. That is what they are designed to do. I can say that I oppose the developer from implementing your version of cash cost basis as not useful to almost everyone and will just confuse things.

  13. 13 Posted by Jerry on 13 Aug, 2020 08:29 PM

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    I will try out the investment performance one to see how that works.

    I am pretty sure what I was looking for worked for me before version 1918 (But I cannot find where to download 1917, if you know the link, please let me know). Basically what I did is to add an entry of buying XXX share with the total cost of 0. The per price will be set to 100, but that won't impact the cost basis.

  14. 14 Posted by sth on 13 Aug, 2020 08:35 PM

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    Yes, you can do that. You can still do that. If you set all your reinvestment values to zero then it will just show the original cost. Of course you have lost all that information which means you can't use it for tax purposes and will have to go calculate your actual capital gains and not your "cash capital gains" or whatever you are calling it. Also you lose the dividend income statement that you have to pay tax on.

    Nothing in any of your screen shots shows a problem AFAICT. You can set all those dividends to zero value and pretend there was no money associated with them.

  15. 15 Posted by Jerry on 13 Aug, 2020 08:43 PM

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    So this is the difference between previous version vs. current version.

    1. In previous version: If I add entry of buying 10 share at total cost of 0 (per share box will auto filled with 100 as default), the cost basis will not change.

    2. In current version, if I do the same, the cost basis will add $1,000 (I think it's from 100 per share multiplied by 10 share?)

    So I think the difference is that, the cost basis used to be added up by the total amount in each entry, but now is using # of shares multiple by per share price.

    Unfortunately, even if I say I bought the 10 shares for $0, the per share price box will be set to the default value of 100, instead of 0. Otherwise it will resolve my issue.

  16. 16 Posted by sth on 14 Aug, 2020 12:45 AM

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    Then make it a transfer shares in as I suggested. You are trying to make a dividend reinvestment not be a reinvestment.

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