Wash sales and average cost basis



Vanguard provides gain and loss information where the cost
basis is determined using the average cost single category
method. The mutual fund pays monthly dividends, so any
redemption that results in a loss is generally a wash sale.
I've been trying to reconcile these figures with my
understanding of wash sales and the average cost method.
I've been able to reproduce Vanguard's numbers for years
prior to 2006 for the most part. There seems to be the
infrequent discrepancies, typically only one or two cents,
which I attribute to rounding errors. But in 2006, there was
a fair amount of activity in this account, and I don't
understand how Vanguard came up with some of its numbers.

My first question concerns a relatively simple case of
multiple redemptions. I just want to make sure I understand
the basics. Consider this situation:

12/31 Reinvested dividend for 10 shares.
1/31 Reinvested dividend for 10 shares.
2/15 Redemption of 50 shares results in a loss.
2/28 Reinvested dividend for 7.5 shares.
3/15 Redemption of 50 shares results in a loss.
3/31 Reinvested dividend for 5 shares.

Here's my understanding of how it's supposed to work: The
first redemption is a wash sale because of the dividends
reinvested on 1/31 and 2/28. The disallowed loss is
(10+7.5)/50=35% of the loss realized on the sale. The second
redemption is a wash sale because of the dividends
reinvested on 3/31, but not 2/28, so the disallowed loss is
5/50=10% of the loss realized on that sale. The shares
purchased on 2/28 don't contribute to the disallowed loss,
even though they are in the 61-day window, because they were
used in calculating the disallowed loss on the first
redemption. Is my explanation correct? If not, how does it

My second question is, how do I calculate the cost basis of
a redemption if purchases occurs on the same day? In my
particular case, a mandatory IRA distribution and reinvested
dividends resulted in purchases the same day a check on the
account cleared. Do I just treat the transactions as
completely independent or do I have to do some sort of
averaging? I suspect the latter because treating them
independently results in figures that don't match what
Vanguard came up with, regardless of which order I process
the transactions. (Of course, Vanguard could be wrong, too.)

Thanks for any help.
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