How to Exchange Mutual Funds Without Tax


Investors who invest in mutual funds buy shares of stocks and other securities from mutual fund companies, which aggregate investments from different investors to buy different securities for their portfolios. Investors can sell or redeem their individual shares or exchange them for different investments within fund families. According to the Internal Revenue Service, you must report any realized gains if you sell or exchange your mutual funds. However, you may also report a capital loss and deduct your loss. To avoid income tax liabilities, you must sell your mutual fund as a "wash sale" and then purchase new funds. If done within 30 days, the IRS considers this as an exchange and not as a sale.

Calculate your original basis. Your original basis is typically the price you paid to purchase your mutual funds. If you purchased your mutual funds, your basis includes investor commissions and mutual fund load fees.

Sell your mutual funds at a loss. The IRS allows you to sell your fund shares within 30 days before you purchase new funds without having to report income tax liabilities. Known as a "wash sale," you can sell your fund at a loss before purchasing identical shares. The IRS treats this transaction as an exchange even though you are first selling your original funds and subsequently purchasing new funds.

Purchase your new shares within the same fund family to avoid recognizing a gain from your exchange. According to the IRS, you must purchase your identical or substantially identical shares from the same mutual fund. Otherwise, it is not a wash sale, and you may pay taxes.

Contact your investment adviser. You can speak with your investment adviser to help you exchange your funds within the same family of funds to avoid income tax liabilities. You can specifically direct your investment adviser to locate only identical or substantially similar funds to avoid income taxes.

Review your Form 1099-B. Your mutual fund broker is required to report the transaction on the IRS Form 1099-B or similar form. If your 1099 shows a gain, you must report the gain. However, you also can deduct your losses if you do not qualify for the wash sale rules.

Report your losses or gains if you did not have a wash sale. You must use Schedule D, Capital Gains and Losses, of IRS Form 1040 (see Resources).

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