Dealing with a Mutual Fund Transfer
Sometimes when dealing with one of my Boston – area tax and financial planning clients, I will see changes in their investment line-up. Clients may change the mix of their investments for a number of reasons. Hopefully, they are using a plan to guide them to decide what to buy and an exit strategy about what and when to sell their mutual funds.
We can look at the reasons for a change in the mix of mutual fund investments in a separate post. My focus here is on the potential income tax liability for transfers of mutual fund balances to another fund or funds within the same mutual fund family.
Often, a mutual fund family like Fidelity, Vanguard or T Rowe Price allows an investor a “free” exchange of mutual fund share balances into another fund in the same mutual fund family. In this case, the free part typically means that the mutual fund family will not charge you a load or commission on the shares bought in the new fund. But investors may be confused when they receive a Form 1099-B at the end of the tax year detailing the transfer.
Many may question whether or not the taxpayer is required to report the transfer since this was “only a transfer” from one mutual fund to another within the same fund company.
The short answer: Yes. Although the funds may have been transferred within the same mutual fund family, it may have produced a capital gain or loss. If this occurs in a taxable account (not an IRA), the transaction needs to be reported when you file your income taxes on Form 8949, Sales and Other Disposition of Capital Assets, and on Schedule D.
To properly determine the amount of gain or loss and the type (short versus long-term) you need to have good records. Most mutual fund families now maintain the basis of the shares you bought and when so this information should be readily available for you or your professional tax preparer.