Just got off the phone with Vanguard Cost Basis Dept.
They explained to me that I have been confused by Pub 550 and misinterpreting what it says.
Pub 550 says:
"If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities". That would be, i.e., the purchased shares that triggered the wash sale rule.
This is exactly what Vanguard is doing.
Note: the disallowed loss can be less than the loss realized.
