Does IRS consider EXCHANGE of share classes as SELL then BUY for tax purposes.

CathyG

I've finally been able to upgrade a couple share classes (DLTNX to DBLTX and PTTDX to PTTRX, all in Scottrade). Lower minimums now for higher class and, even though 5 different people at Scottrade told me I had to actually sell the shares first, then rebuy, ONE ST rep said they COULD EXCHANGE share classes. I should have checked before I did this, but now they show no Cost Basis for the upgraded shares and I'm concerned that I'll now have to pay taxes on gains for the older shares.

Has anyone here done this?

msf

"Generally, you can also exchange, tax-free, one share class for another in the same mutual fund. For example, you may have previously purchased Investor Shares of a particular Schwab mutual fund and now have accumulated enough to qualify for the lower-cost Select Shares® class. Making the switch is easy and, when done right, is a non-taxable event."
http://www.schwab.com/public/schwab/research_strategies/market_insight/financial_goals/tax/keep_more_gains_with_a_tax_free_exchange.html

There's an extremely important qualification buried in that quote: "when done right". The broker needs to do some magic in the back room (I never really looked into the exact record keeping required); otherwise an exchange will be treated as a taxable sale and purchase.

One can even convert some Vanguard index funds into ETF shares tax-free. Vanguard has pointed out that you have to be careful about this - the broker has to do the conversion correctly, and that Vanguard's brokerage will do this right, some others will also. (Sorry, can't find a cite now.)

The point is that a tax free exchange between share classes is possible, but it can also be botched. And only the broker knows how it was done.

I have converted VG investor class shares to admiral class shares, and vice versa, with no tax effect. (Keeping track of the cost basis however, is not simple.)

CathyG

Thanks so much, msf, for your great explanation and link! Just what I was looking for!
Cathy

Investor

How does it show on transaction history? If your transaction history is showing a sale and purchase it is possible that it was not a correct tax-free correction. Hopefully they got it right. If not be prepared to pay taxes on realized gains.

CathyG

Thanks for the follow-up, Investor. I did check history and old share class does NOT show as sale. But NEW class shows NO COST history so ....just to be sure, I sent request to Scottrade to verify. THANKS