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.
Inquiring minds want to know.
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.