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We were getting our monthly dividends from this mutual fund re-invested in this same fund. Maybe the disallowable loss amount is equal to the monthly dividend, I'll have to check.

Well, the loss wouldn't be equal. But the number of shares with a disallowed loss would be the same.

But the distributions we took went into Vanguard money market fund. I'd be surprised if the Short Term Bond fund is considered a like-investment to the money market fund. But you might be right. Once it was in the money market fund.

That's not what's at issue. What happens is that within 30 days (before or after) of you selling part of the fund, some shares were bought back (again, the buying could be before the sale) via dividend reinvestment, then those # of shares are wash sales and you can't claim the loss on those shares.

(The disallowed loss is added back to the current basis, so eventually you will 'claim' it)

For instance. Say you sold 1000 shares on October 15th. And there were dividend reinvesmtments on Sept 30th, which resulted in 10 shares bought. And On October 31st, which resulted in 8 shares bought. 18 shares would then have a wash sale.

So if your proceeds were \$200 more than your basis (or \$0.20 per share) - using an average basis - your disallowed loss would be \$0.20 * 18 = \$3.60.

Question 2: Just a yes or no answer...will we usually make out better if we do not use the Average Cost method when computing our capiatal gains/losses?

It depends on a ton of factors such as how much of a gain/loss you have, what order the fund what up on down in, which other method you use (FIFO, average cost/double category metho, etc). There's no way to know without doing the math.

Fact is, all told in the end (meaning once you've eventually sold out of the fund, that is), your total gain/losses will be the same. It will just be some differences in how soon you take them.

Note: Once you chose a method, you must continue to use that method for all shares of that fund. So you can't pick and chose each year. In which case I would consider using average cost basis/single category, just because its simplest, unless there's a big difference.

Here's information on the cost basis options:
http://www.irs.gov/publications/p564/ar02.html#d0e1331

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