When it was announced that Vanguard held 10% of the Twitter stock… got me thinking.
Since no Specific Fund was mentioned, I assume Vanguard holds each fund’s stock centrally.
I also assume that if Fund A decides to sell 100 shares and Fund B decides to buy 100 shares of the same stock on the same day… Vanguard does Nothing… except bookkeeping as to each fund’s holding in that centrally held stock.
Now the question: Does that bookkeeping change cause a Taxable Capital Gain or Loss? Or does the stock have to be actually sold on the market to cause a taxable event.
Seems since the stock is held in Vanguard’s Name there would not be a taxable event but the basis would move with the bookkeeping.
Hi, this is a great question! As each individual fund reports all cap gains and dividends separately, in your example, the fund “selling” the shares has to report it as long and/or short term gain/loss. This is a requirement for tracking a fund’s turnover ratio as well as tracking a given fund’s overall performance. Also, I’m not certain that Vanguard would “do nothing” in your example. There may be more going on here than a simple bookkeeping entry. It’s possible that Fund A is required to sell those 100 shares in the open market, or at least report it as a “sale” based upon some uniform determination of a given security’s fair market value at the time, and incur whatever the taxable result would otherwise be, though I’m not sure. It’s possible a deep dive into one or more fund prospectuses from a given fund family (Vanguard in this case) might just reveal the answer. Regardless whether or not there is an actual sale of the underlying stock, I’m certain the “selling” fund has to report the taxable gain or loss.
Each fund is legally a separate company so the fact that Vanguard owns them doesn’t change the profit, loss, and reporting requirements for each separate investment company (fund). But there is a tax difference between ETFs and Mutual funds. Mutual funds often throw off capital gains distributions, ETFs not so much. That makes ETFs better, fewer taxable events
This is my understanding of capital gains for individuals holding funds in non-retirement accounts. Some of this information was provided in the earlier responses. Note that index mutual funds/ETFs are more tax efficient than actively managed mutual funds
The purchase and sale of shares by a mutual fund is similar to the purchase and sale of individual stocks. The difference between the purchase and sale price is a capital gain (or loss).
ETFs are (slightly) more tax efficient than mutual funds because ETFs create and redeem funds using a middle entity, the “Authorized Participant”.
Some Vanguard index funds have a dual-share structure allows the mutual fund side to use the better tax efficiency of the ETF. This results in the mutual fund side having the same tax efficiency as the corresponding ETF. The Vanguard dual -share structure patent expires in 2023.