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I have some SPY for many years and it has gone up since then.

I noticed that the fees are much higher than the VOO which is also an ETF for the SP500.

Both ETF's hold the same underlying SP500 stocks.

So, can I sell my SPY and then buy the equivalent VOO?

I found the following keywords but no answers:

1) substantially identical

2) wash sale

3) creation redemption (using etf arbitrage, in theory one could redeem and then create rather than buy and sell)

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  • The fees on SPY are about 0.1% per year. That means $100 in fees for every $100,000 invested. Considering the S&P regularly moves ~1% per day, even $0 fees wouldn't really be "substantially lower". And if 0.1% bothers you, why go for VOO with 0.04% when you could buy a mutual fund like FXAIX with 0.015% or FNILX with 0.00% fees? – The Photon Apr 1 at 23:35
  • Tax questions require a country tag. – Chris W. Rea Apr 2 at 2:52
  • @The-Photon intriguing question. I am inclined not to trust any fund where there is a manager that has control. However, I am looking into your recommendations. Thank you! – tradeordie Apr 2 at 18:13
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    Those funds are as much constrained to track their indices as the ETFs you mentioned are. FNILX there is maybe less external control because FIdelity itself owns the index. But AFAIK that is basically to avoid paying license fees to S&P, and the goal is still to track the 500 largest cap companies in the US market. – The Photon Apr 2 at 18:45
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Generally, if you sell an asset in a non-tax-sheltered account for more than you paid for it, that's a capital gain, and you have to pay capital gains tax. There are exceptions, but I don't believe any exceptions apply here.

The wash sale rule says that if you sell a security at a loss and buy a "substantially identical" security shortly before or after, you may not be able to count that as a capital loss. However, the rule only applies to losses, not gains.

The creation and redemption processes are how certain institutional investors barter stock for ETF shares and vice versa. Only certain institutions are allowed to do this; individual investors can't create and redeem shares, and have to buy and sell them instead. Furthermore, creation and redemption are only done in large units; currently, one creation unit of SPY consists of stock worth about $12,000,000.

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  • This conversion is not a purchase it's just changing how I hold my stock. So, I feel like it is against the spirit of the tax code to charge taxes. So, I'm eagerly waiting for someone to tell me how to do it... – tradeordie Apr 1 at 21:51
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    @tradeordie Where did you get the information that it's possible to "just change how you hold your stock" without selling and buying? – Tanner Swett Apr 1 at 23:35
  • I got it by looking into my heart and thinking what's right! – tradeordie Apr 2 at 18:10
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So, can I sell my SPY and then buy the equivalent VOO?

Absolutely - nothing prevents you from doing so. And if you have a gain then wash sale rules are irrelevant. You would then owe capital gains tax on the gain in value. But the cost basis for VOO would be higher, so your gains on that fund would be lower. So your choice is to pay, say $1,000 in tax now (completely making number up) and $500 in tax when you sell VOO rather then paying $1,500 in the future if you kept SPY and sold it later. You can decide if that cash flow difference is worth the extra return from the difference in fees between the funds.

Even if it were sold at a loss, you could still do it, you just may not be able to deduct the loss as an investment loss until you sell the VOO. Due to wash sale rules, the cost basis would be carried forward, so the loss could not be claimed until you sold VOO.

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  • so VOO and SPY are similar , as you said wash sale rule will apply – puzzled Apr 1 at 19:21
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    @puzzled not if there is a gain. – D Stanley Apr 1 at 19:25
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    I have a gain, and I don't want to pay taxes on this transaction which is just to switch to something equivalent. Can I avoid paying the taxes somehow? – tradeordie Apr 1 at 19:47
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    No - if you have a capital gain from the sale then you'll pay taxes on that. The good news is you'll have less of a capital gain when you sell the VOO. – D Stanley Apr 1 at 19:54
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    @DStanley But the bad news is there may be less of a gain to be taxed (e.g. if one has to retain some of the proceeds to pay the taxes and can't reinvest them). In fact, it's conceivable that this might cost more than paying slightly higher fees. – Michael Apr 1 at 20:07
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An actual conversion to a different holding would not be a taxable event. For example VFIAX to VOO, if converted by the fund provider. (I'm using Vanguard funds as an example both because one appeared in the question and because they are somewhat unique in making ETFs a share class of their mutual fund. They specifically support this non-taxable conversion.)

You are talking about a sale on the secondary market and replacement by purchasing an equivalent fund. That is not a conversion in the eyes of the IRS.

It's not possible for a small investor to treat an exchange between ETF shares from different providers as a conversion. For an authorized participant, things are actually different. They can redeem ETF blocks for shares of the underlying securities, and then bundle those into a creation unit of the other ETF. Because the underlying securities are exchanged not bought or sold, the main event isn't taxable (which is what gives ETF their tax advantage over mutual funds). Accounting for any difference in holdings between the two funds would still require purchase and/or sale with all the tax ramifications thereof.

Of your three ideas, "substantially identical" is only relevant to wash sales, "wash sales" don't affect taxation when there is a profit, and the creation/redemption idea is perfectly valid as explained above but does not apply to you because

  1. these blocks/creation units are quite large, and

  2. these actions are only available to designated "authorized participants"

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