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I have a taxable investment account consisting of Vanguard mutual funds that I have held for less than a year.

I recently learned that ETFs are more tax efficient in nature because the managers don't have to rebalance like mutual fund.

Many of these mutual funds have an ETF version, so I am thinking of converting. Can I do a 1031 exchange so that selling the mutual funds doesn't generate a tax liability?

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  • Assuming this is United States? If so can you edit and add country tag. Tax regulations depend on country
    – Dheer
    Commented Sep 1, 2015 at 14:46

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I don't believe you can do that.

From the IRS:

Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of:

  • Inventory or stock in trade
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Certificates of trust

I highlighted the relevant items for emphasis.

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You cannot do a 1031 exchange with stocks, bonds, mutual funds, or ETFs.

There really isn't much difference between an ETF and its equivalent index mutual fund. Both will have minimal capital gains distributions. I would not recommend selling an index mutual fund and taking a short-term capital gain just to buy the equivalent ETF.

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